a) Calculate the rate of forward premium of the euro on the 12-month forward exchange rate both for buying and selling rates.  b) Assuming that a forward contract is the only hedging tool available in the home country of Galina Works, calculate the dollar receipts of the 1.6 million euros receivable from the foreign customer under a hedge condition.  c) If the current spot rate at the end of 6 months is 1 dollar = Euros 0.9325-0.9400, comment on Galina Works hedging decision

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
icon
Related questions
Question

Galina Works trades regularly with customers in different countries. Its home currency is the dollar. The company expects to receive 1.6 million euros in six months’ time from a foreign customer.
Current exchange rates in the home country of Galina Works are as follows:


Exchange rate         Euro Per dollar
Spot                        0.9431-0.9456
6-month forward    0.9360- 0.9394
12-month forward  0.9368-0.9406


Required:
a) Calculate the rate of forward premium of the euro on the 12-month forward exchange rate both for buying and selling rates. 
b) Assuming that a forward contract is the only hedging tool available in the home country of Galina Works, calculate the dollar receipts of the 1.6 million euros receivable from the foreign customer under a hedge condition. 
c) If the current spot rate at the end of 6 months is 1 dollar = Euros 0.9325-0.9400, comment on Galina Works hedging decision.

Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Follow-up Questions
Read through expert solutions to related follow-up questions below.
Follow-up Question

d. Discuss whether Galina Works should avoid exchange rate risk by invoicing foreign customers in dollars.

 e. Explain to Galina Works how, in respect of foreign sales, discounting and factoring can be used as hedging tools to manage foreign currency risk. 

Solution
Bartleby Expert
SEE SOLUTION
Knowledge Booster
Accounting for Foreign Exchange Transactions
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education