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...

Extracted text: 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.


Extracted text: iv. Comment on the wisdom of the merchant decision to hedge by comparing his total receipts in pound sterling, assuming the spot rate ($ per £) at the dates of receipt of first payment upon shipment remains the same but rates at the second instalment ($60,000) and third instalment ($30,000), were as follows: Spot rate (one month after shipment) Spot rate (three months after shipment) 1.694 -1.696 1.700 -1.704