Goran plc is a UK company with export and import trade with the USA. The following transactions, in the currency specified, are due within the next six months:
Purchases of goods, cash payment due in three months:
£116 000
Sale of finished goods, cash receipt due in three months:
$197 000
Purchase of goods, cash payment due in six months:
$447 000
Data relating to exchange rates and interest rates are as follows:
Exchange rates:
$/£
Spot
1.7106–1.7140
Three months forward
1.7024–1.7063
Six months forward
1.6967–1.7006
Interest rates
Borrow (%)
Deposit (%)
Sterling
12.5
9.5
Dollars
9
6
(a) Discuss four techniques that a company like Goran might use to hedge against the foreign exchange risk involved in foreign trade.
(b) Calculate the net sterling receipts/payments that Goran might expect for both its three-month and six-month transactions if the company hedges foreign exchange risk using (i) the forward foreign exchange market and (ii) the money market.
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