(b) Jackton Company limited is a UK firm that has bought goods from a US Supplier andmust pay US $4 million in three month time. The company finance director wishes tohedge against the foreign exchange risk and is considering 3 methods.Using forward exchange contractUsing the money market hedgeUsing lead paymentThe annual interest rate and exchange rates are given below;US SUK £DepositRate1 month7%Borrowing rate10.25%DepositBorrowing10.75%3 month7%10.75%4%14%4.25%Spot rate£:1: $ 1.8625 1.86351 month forward0.6-0.58 cents premium3 months forward1.80 1.75 cent premiumAdvice the company on the best method to use.(Show all your workings)[12 marks]

Conclusion:Forward Contract: GBP 2,222,222.22Money Market Hedge: GBP 2,184,002.18Lead Payment: GBP…

Answered: (b) Jackton Company limited is a UK…

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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