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Problem 4 A Saudi company has bid for an export order to a customer in the U.K. That order would generate a cash flow of £5 million in three months. Currently, the spot rate is SAR4.70/£ and the three-month forward rate is SAR4.68/£. The company's CFO wants to hedge this FX exposure, and he has asked you to help him determine whether it should be with a forward or with an option, considering that the company faces two sources of uncertainty: The uncertainty related to the export order, which it may or may not receive . The uncertainty related to the exchange rate between the SAR and the £ in three months Forward 4. If the company hedges with a forward, what would happen now? Specifically: . What would the position be? . What would the exchange rate on the forward be? . Would there be a cash flow? Buy £ forward or Sell £ forward Position Exchange rate Cash Flow Yes or No

Problem 4 A Saudi company has bid for an export order to a customer in the U.K. That order would generate a cash flow of £5 million in three months. Currently, the spot rate is SAR4.70/£ and the three-month forward rate is SAR4.68/£. The company's CFO wants to hedge this FX exposure, and he has asked you to help him determine whether it should be with a forward or with an option, considering that the company faces two sources of uncertainty: The uncertainty related to the export order, which it may or may not receive . The uncertainty related to the exchange rate between the SAR and the £ in three months Forward 4. If the company hedges with a forward, what would happen now? Specifically: . What would the position be? . What would the exchange rate on the forward be? . Would there be a cash flow? Buy £ forward or Sell £ forward Position Exchange rate Cash Flow Yes or No

Essentials Of Investments
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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Problem 4 A Saudi company has bid for an export order to a customer in the U.K. That order would generate a cash flow of £5 million in three months. Currently, the spot rate is SAR4.70/£ and the three-month forward rate is SAR4.68/£. The company's CFO wants to hedge this FX exposure, and he has asked you to help him determine whether it should be with a forward or with an option, considering that the company faces two sources of uncertainty: . The uncertainty related to the export order, which it may or may not receive . The uncertainty related to the exchange rate between the SAR and the £ in three months Forward 4. If the company hedges with a forward, what would happen now? Specifically: . What would the position be? • What would the exchange rate on the forward be? . Would there be a cash flow? Buy £ forward or Sell £ forward Position Exchange rate Cash Flow Yes or No
Transcribed Image Text:Problem 4 A Saudi company has bid for an export order to a customer in the U.K. That order would generate a cash flow of £5 million in three months. Currently, the spot rate is SAR4.70/£ and the three-month forward rate is SAR4.68/£. The company's CFO wants to hedge this FX exposure, and he has asked you to help him determine whether it should be with a forward or with an option, considering that the company faces two sources of uncertainty: . The uncertainty related to the export order, which it may or may not receive . The uncertainty related to the exchange rate between the SAR and the £ in three months Forward 4. If the company hedges with a forward, what would happen now? Specifically: . What would the position be? • What would the exchange rate on the forward be? . Would there be a cash flow? Buy £ forward or Sell £ forward Position Exchange rate Cash Flow Yes or No
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