(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. i. Required: ii. State what are the presumed advantages of using forward exchange contracts. iii. Calculate the sterling amount that the merchant would receive on these contracts.
(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. i. Required: ii. State what are the presumed advantages of using forward exchange contracts. iii. Calculate the sterling amount that the merchant would receive on these contracts.
ChapterP2: Part 2: Exchange Rate Behavior
Section: Chapter Questions
Problem 1Q
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Transcribed Image 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.
i.
Required:
ii.
State what are the presumed advantages of using forward exchange contracts.
iii.
Calculate the sterling amount that the merchant would receive on these contracts.
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