Given the information above, which hedging alternative would be preferable? Please show all relevant workings in support of your recommendation.
MMA plc., is a UK-based manufacturer of heavy machine components for the power industry. MMA exports a significant proportion of its products to clients in the US. In order to compete with other US suppliers of heavy machine components, MMA prices its exports in US dollars. It is March 2021 and MMA has just shipped a large consignment worth $50 million to TLP Inc., one of MMA’s major clients in the US. Payment for this shipment is due in 90-days.
MMA treasury department is concerned about the recent volatility of the dollar[1]pound exchange rates and has suggested that its exposure to the US dollar should be hedged.
The following currency and
Spot Rate (bid – ask): US$1.5077/£ - US$1.5379/£
Barclays 90-day forward quote ((bid – ask): US$1.5025/£ - US$1.5432
90-day dollar deposit interest rate: 0.8% per annum
90-day pound deposit interest: 1.2% per annum
90-day US dollar borrowing rate: 1.2% per annum
90-day pound borrowing rate: 1.8% per annum
Given the information above, which hedging alternative would be preferable? Please show all relevant workings in support of your recommendation.
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