Calculate the expected Euro receipts in one month and in three months using the forward market.
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International Finance
1. CQS plc is a UK company that sells goods solely within UK. CQS plc has recently tried a foreign supplier in Netherland for the first time and need to pay €250,000 to the supplier in six months’ time. You as financial manager are concerned that the cost of these supplies may rise in Pound Sterling terms and has decided to hedge the currency risk of this account payable. The following information has been provided by the company’s bank:
Spot rate (€ per £): 1·998 ± 0·002
Six months’ forward rate (€ per £): 1·979 ± 0·004
Money market rates available to CQS plc:
Borrowing Deposit
One-year Pound Sterling interest rates: 6·1% 5·4%
One-year Euro interest rates: 4·0% 3·5%
Assuming CQS plc has no surplus cash at the present time you are required to evaluate whether a money market hedge, a forward market hedge or a lead payment should be used to hedge the foreign account payable.
2. On 30th June 2009 when a forward contract matured for execution you are asked by an importer customer to extend the validity of the forward sale contract for US$ 10,000 for a further period of three months.
Contracted Rate US$1 = Rs.41.87
The US Dollar quoted on 30.6.2009
Spot Rs. 40.4800/Rs. 40.4900
Premium July 0.1100/0.1300
Premium August 0.2300/0.2500
Premium September 0.3500/0.3750
Calculate the cost for your customer in respect of the extension of the forward contract.
Rupee values to be rounded off to the nearest Rupee.
Margin 0.080% for Buying Rate
Margin 0.25% for Selling Rate
3. Wenden Co is a Dutch-based company which has the following expected transactions.
One month: Expected receipt of £2,40,000
One month: Expected payment of £1,40,000
Three months: Expected receipts of £3,00,000
The finance manager has collected the following information:
Spot rate (£ per €): 1.7820 ± 0.0002
One month forward rate (£ per €): 1.7829 ± 0.0003
Three months forward rate (£ per €): 1.7846 ± 0.0004
Money market rates for Wenden Co:
Borrowing Deposit
One year Euro interest rate: 4.9% 4.6%
One year Sterling interest rate: 5.4% 5.1%
Assume that it is now 1 April.
Required:
a. Calculate the expected Euro receipts in one month and in three months using the forward market.
b. Calculate the expected Euro receipts in three months using a money-market hedge and recommend whether a forward market hedge or a money market hedge should be used.
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