(b) Jackton Company limited is a UK firm that has bought goods from a US Supplier and must pay US $4 million in three month time. The company finance director wishes to hedge against the foreign exchange risk and is considering 3 methods. Using forward exchange contract Using the money market hedge Using lead payment The annual interest rate and exchange rates are given below; US S UK £ Deposit Rate 1 month 7% Borrowing rate 10.25% Deposit Borrowing 10.75% 3 month 7% 10.75% 4% 14% 4.25% Spot rate £:1 : $ 1.8625 1.8635 1 month forward 0.6-0.58 cents premium 3 months forward 1.80 1.75 cent premium Advice the company on the best method to use. (Show all your workings) [12 marks]
(b) Jackton Company limited is a UK firm that has bought goods from a US Supplier and must pay US $4 million in three month time. The company finance director wishes to hedge against the foreign exchange risk and is considering 3 methods. Using forward exchange contract Using the money market hedge Using lead payment The annual interest rate and exchange rates are given below; US S UK £ Deposit Rate 1 month 7% Borrowing rate 10.25% Deposit Borrowing 10.75% 3 month 7% 10.75% 4% 14% 4.25% Spot rate £:1 : $ 1.8625 1.8635 1 month forward 0.6-0.58 cents premium 3 months forward 1.80 1.75 cent premium Advice the company on the best method to use. (Show all your workings) [12 marks]
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
Related questions
Question
![(b) Jackton Company limited is a UK firm that has bought goods from a US Supplier and
must pay US $4 million in three month time. The company finance director wishes to
hedge against the foreign exchange risk and is considering 3 methods.
Using forward exchange contract
Using the money market hedge
Using lead payment
The annual interest rate and exchange rates are given below;
US S
UK £
Deposit
Rate
1 month
7%
Borrowing rate
10.25%
Deposit
Borrowing
10.75%
3 month
7%
10.75%
4%
14%
4.25%
Spot rate
£:1
: $ 1.8625 1.8635
1 month forward
0.6-0.58 cents premium
3 months forward
1.80 1.75 cent premium
Advice the company on the best method to use.
(Show all your workings)
[12 marks]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F61dbbf6e-eca9-4c12-8162-3068f522694b%2F9cca55b9-e83f-469a-b130-c8b79776238b%2Fhxwppeo_processed.jpeg&w=3840&q=75)
Transcribed Image Text:(b) Jackton Company limited is a UK firm that has bought goods from a US Supplier and
must pay US $4 million in three month time. The company finance director wishes to
hedge against the foreign exchange risk and is considering 3 methods.
Using forward exchange contract
Using the money market hedge
Using lead payment
The annual interest rate and exchange rates are given below;
US S
UK £
Deposit
Rate
1 month
7%
Borrowing rate
10.25%
Deposit
Borrowing
10.75%
3 month
7%
10.75%
4%
14%
4.25%
Spot rate
£:1
: $ 1.8625 1.8635
1 month forward
0.6-0.58 cents premium
3 months forward
1.80 1.75 cent premium
Advice the company on the best method to use.
(Show all your workings)
[12 marks]
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