A firm exports goods from Botswana to South Africa costing ZAR450 000.00. Payment isexpected in 3 months’ time. Exchange rates are as follows:▪ Current spot rate: BWP1.00 = ZAR1.30▪ Forward rate in three months: BWP1.00=ZAR1.30▪ Spot rate in three months: BWP1.00 = ZAR1.40Required:a. Examine whether hedging is beneficial to the firmb. Outline any three challenges of using forward contracts
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A firm exports goods from Botswana to South Africa costing ZAR450 000.00. Payment is
expected in 3 months’ time. Exchange rates are as follows:
▪ Current spot rate: BWP1.00 = ZAR1.30
▪ Forward rate in three months: BWP1.00=ZAR1.30
▪ Spot rate in three months: BWP1.00 = ZAR1.40
Required:
a. Examine whether hedging is beneficial to the firm
b. Outline any three challenges of using forward contracts
Step by step
Solved in 2 steps
- Spot Exchange Rate is GBP 1.83155 = 1 OMR (For Immediate Delivery). Instead of buying GBP immediately you can enter into a contract with the bank to deliver the currency after 6 months. The bank has quoted 6 months forward rate as GBP1.83355 = 1 OMR. (Home Currency is OMR, which is given as Indirect quotes).Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months. S_0 (EUR/AUD) 0.60 Se (EUR/AUD) 0.50 (0.3) and 0.65 (0.7) Premium on AUD call option R = EUR0.02 Exercise exchange rate E = 0.62 Time to expiry 3 months What is the expected value of payables in AUD under hedge Will the option to hedge be undertaken on the basis of expected spot rate? Explain.Answer the attached question
- The current spot exchange rate is $1.22/€ and the three-month forward rate is $1.30/€. You enter into a short position on €1,000. At maturity, the spot exchange rate is $1.50/€. How much have you made or lost? A. Lost $200 B. Made €200 C. Made $80 D. Made $200Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months. What is the expected spot rate?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 shipment and $30,000 three months after shipment. The quoted foreign exchange rates ($ 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 -1.692 1.687 -1.690 1.680 -1.684 The merchant decides to enter forward exchange contracts through his bank to hedge these transactions 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.
- Consider a U.S.-based company that exports goods to Switzerland. The U.S. company expects to receive a payment of 50,000 Swiss Francs (CHF) on a shipment of goods in 6 months' time. The U.S. interest rate is 2% p.a., and the Swiss interest rate is 4% p.a. Assume that the current spot rate is CHF0.96/USD. Which of the following statements is correct: The risk to the U.S. company is that the value of the Swiss franc will rise and therefore it should enter into a contract to buy Swiss francs forward The risk to the U.S. company is that the value of the Swiss franc will decline and therefore it should enter into a contract to buy Swiss francs forward The risk to the U.S. company is that the value of the Swiss franc will decline and therefore it should enter into a contract to sell Swiss francs forward The risk to the U.S. company is that the value of the Swiss franc will rise and therefore it should enter into a contract to sell Swiss francs forwardToday is 1 July and the spot exchange rate for AUD 1.00 = EUR 0.7000. You have purchased equipment from a European supplier and the invoice amount is EUR 10,000. a) If you paid the invoice today, what is the AUD cost of the purchase?Currently, the spot exchange rate is $1.67 per £ and the three-month forward exchange rate is $1.69 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,670,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C Determine whether the interest rate parity is currently holding. Determine whether the interest rate parity is currently holding.
- Currently, the spot exchange rate is $1.51 per £ and the three-month forward exchange rate is $1.53 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,510,000 or £1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Complete this question by entering your answers in the tabs below. Required A Required B Required C If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Note: Do not round intermediate calculations. Interest arbitrage Arbitrage profit Borrow in the U.S. and invest in the U.K. Hedge exchange rate risk by selling British pounds forward. < Required A Required CMrGyal buys and sells regularly with customers worldwide. Its home currency is the dollar. The company expects to receive Euros 1.6 million in 6 months’ time from a customer abroad.Exchange rates at the moment in the home country of MrGyal are as follows: Exchange rate Euro Per dollarSpot 0.9431-0.9456Six-month forward 0.9360- 0.9394Twelve-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 MrGyal, calculate the dollar receipts of the Euros1.6 million 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 MrGyal hedging decisionA newspaper provides spot exchange rate of $1 = £.7555 and 1-year forward rate of $1=£.7755. You’ll also need to use the additional information provided in the problems. Jay has Euro 1,000 wishes to trade out of euro and into Pound. The USD-Euro exchange rate is quoted as $1.30 = Euro1.00. How much Pound will the customer get, 2 decimal places?