Question 1:(a) A merchant in the UK has agreed to sell goods to an importer in the USA at an invoice price of$130,000. Of this amount, $40,000 will be payable on shipment, $60,000 one month after shipmentand $30,000 three months after shipment.The quoted foreign exchange rates ($ per £) at the date of shipment are as follows:Spot rate (on shipment)Forward rate-(one month after)Forward rate-(three months after)1.690 -1.6921.687 -1.6901.680 -1.684The merchant decides to enter forward exchange contracts through his bank to hedge thesetransactions for fear that the future spot rates may change to his disadvantage.i.Required:ii.State what are the presumed advantages of using forward exchange contracts.iii.Calculate the sterling amount that the merchant would receive on these contracts.

Data given: Particulars Amount ($) On shipment $40,000 1 month after shipment $60,000 3…

Answered: (a) A merchant in the UK has agreed to…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 2,000 cases of wine at a price of 300 euros per case. The total purchase price is 600,000 euros. Relevant exchange rates for the euro are as follows: Date Spot Rate Forward Rateto October 31 Call Option Premiumfor October 31(strike price $1.50) September 15 $ 1.50 $ 1.56 $ 0.035 September 30 1.55 1.59 0.070 October 31 1.60 1.60 0.100 Vino Veritas Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements at September 30. The wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas purchased a 45-day call option for 600,000 euros. It properly designated the option as a cash flow hedge of a foreign currency payable. Prepare journal entries…
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