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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