i need the answer quickly . A US based IT firm required GBP 100000 in 180 days. The company feels that exchangerates are expected to fluctuate in the next 6 months. Their near accurate estimate basedon a good quality research were as below:Current Rate of GBP = USD 1.50180 days forward rate for GBP = USD 1.48Call premium USD 0.02 (strike price of USD 1.50 for 180 days)help needed.Interest Rates in London for deposits - 4.5% and for loans - 5.1%Interest Rates in New York for deposits - 4.5% and for loans - 5.1%A fair estimate of exchange rate after 180 days is expected to be USD 1.44 with aprobability of 20%, USD 1.46 with a probability of 60% and USD 1.53 with aprobability of 20%.Advise the company on a good hedging strategy. Make suitable assumptions if requiredand state the same

Solution-Following hedhingoptions are avilable(1)-Forward contract=foreign exposure×forward…

A US based IT firm required GBP 100000 in 180 days. The company feels that exchange rates are expected to fluctuate in the next 6 months. Their near accurate estimate based on a good quality research were as below: Current Rate of GBP = USD 1.50 %3D 180 days forward rate for GBP = USD 1.48 Call premium USD 0.02 (strike price of USD 1.50 for 180 days) help need Interest Rates in London for deposits - 4.5% and for loans - 5.1% Interest Rates in New York for deposits - 4.5% and for loans - 5.1% A fair estimate of exchange rate after 180 days is expected to be USD 1.44 with a probability of 209% TISD 46 with a probabilit

A US based IT firm required GBP 100000 in 180 days. The company feels that exchange rates are expected to fluctuate in the next 6 months. Their near accurate estimate based on a good quality research were as below: Current Rate of GBP = USD 1.50 %3D 180 days forward rate for GBP = USD 1.48 Call premium USD 0.02 (strike price of USD 1.50 for 180 days) help need Interest Rates in London for deposits - 4.5% and for loans - 5.1% Interest Rates in New York for deposits - 4.5% and for loans - 5.1% A fair estimate of exchange rate after 180 days is expected to be USD 1.44 with a probability of 209% TISD 46 with a probabilit

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 3P

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A US based IT firm required GBP 100000 in 180 days. The company feels that exchange rates are expected to fluctuate in the next 6 months. Their near accurate estimate based on a good quality research were as below:Current Rate of GBP = USD 1.50180 days forward rate for GBP = USD 1.48Call premium USD 0.02 (strike price of USD 1.50 for 180 days)Interest Rates in London for deposits – 4.5% and for loans – 5.1%Interest Rates in New York for deposits – 4.5% and for loans – 5.1%A fair estimate of exchange rate after 180 days is expected to be USD 1.44 with a probability of 20%, USD 1.46 with a probability of 60% and USD 1.53 with a probability of 20%.Advise the company on a good hedging strategy. Make suitable assumptions if required and state the same.
Brexylite plc is due to pay €1,750,000 to its European suppliers in 3 months’ time. The financial manager 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 €): 1·1410 ± 0·0022 3 months forward rate (£ per €): 1·1574 ± 0·0041 6 months forward rate (£ per €) 1.1582 ± 0.0032 Calculate the expected (£) Stirling payment if the 3 months forward market is used
Hedging using forward rates: Assume the hypothetical spot rate between the JPY and USD was 101.25 JPY per USD. Suppose you are purchasing 2000000 JPY worth of microprocessors deliverable (product and payment) in 3 months with the contract set up between you and your supplier on Friday. How much is that shipment worth in USD. Assume that you want to hedge against exchange rate risk, and go to the bank. The financial specialist at the bank gives you the official 3 month forward rate at 101.18 JPY per USD. What does that imply for your payment to the bank in 3 months?
Suppose that you are the treasurer of IBM with an extra U.S. $1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that’s a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy?
You must make a $1,000,000 domestic payment in New York City in 90 days. Thedollars are available now, and you decide to invest them for 90 days. The U.S. 90-dayTreasury bill rate is 8.00% per annum. The U.K. 90-day Treasury bill rate is 10.00%per annum. The spot exchange rate is $1.8000 per pound sterling. The 90-day forwardrate is $1.7800 per pound sterling. a. Where should you invest for maximum yield with no risk?b. Given the stated interest rates, what forward quotation would create anequilibrium situation with no advantage or disadvantage associated with investingin one country or the other? Ignore transactions costs.c. Would your decision about where to invest change if the U.K. interest rate were14.00% per annum?d. Given the stated spot and forward exchange quotations and the U.S. interest rate,what is the equilibrium or break-even U.K. interest rate?
A US consulting firm sent an invoice of £200,000 to a UK client firm.The spot rate of pound when the invoice was sent was $1.30. The invoice should only be paid by the UK firm six months from now. Forecasted spot rates six months from now are given as below: Forecasted rate Probability $1.25 0.30 $1.27 0.50 $1.30 0.20 The six-month forward rate is $1.25. Required: If the invoice is to be paid six months from now, illustrate by showing your calculations, whether the US firm will be better off by using forward contract to hedge their forex transaction risk in this scenario.
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Credible Research sold a microchip to the Vausten Institute in Germany on credit and invoiced €10 million payable within half a year. Currently, the 6-month forward exchange rate is $1.10/€ and the foreign exchange advisor for Credible Research predicts that the spot rate is likely to be $1.05/€ in 6 months. (i) What would be the expected gain or loss from the forward hedging? (ii) As a decision-maker for Credible Research, would you suggest hedging this euro receivable? Please explain why or why not? (iii) what if the foreign exchange advisor anticipates that the future spot rate will be similar to the forward exchange rate quoted today. As the decision-maker would you propose hedging in this case? If yes or no why?
Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 30 days. You will be making payment on a shipment of imported goods in 30 days and want to hedge your currency exposure. The U.S. risk-free rate is 5.0 percent, and the U.K. risk-free rate is 4.0 percent. These rates are expected to remain unchanged over the next month. The current spot rate is $1.80. Required: Whether you should use a long or short forward contract to hedge the currency risk. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 30 days. Move forward 10 days. The spot rate is $1.83. Interest rates are unchanged. Calculate the value of your forward position.
IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥210 million payable in three months. Currently, the spot USD/JPY rate is 108 and the three-month forward rate is 103. The three-month money market interest rate is 4.6 percent per annum in the U.S. and 2.4 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable. Calculate today's dollar cost of meeting this yen obligation. (USD, no cents)
Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 60 days. You will be making payment on a shipment of imported goods in 60 days and want to hedge your currency exposure. The U.S. risk-free rate is 3.3 percent, and the U.K. risk-free rate is 1.8 percent. These rates are expected to remain unchanged over the next 2 months. The current spot rate is $1.3069. Calculate the no-arbitrage price at which you could enter into a forward contract that expires in 60 days. (X.XXXX)
DePaul International Bank is a U.S. bank that wants to speculate on the dollar-euro exchange rate. A euro (€) costs $1.08 today. The bank expects it to cost $1.12 in 4 months. Current annual interest rates are as follows: Currency Borrowing rate Lending rate Euro 4.8% 4.1% U.S. dollar 7.5% 6.6% The bank doesn't want to use any of its own money, but could borrow either $10,000,000 or €10,000,000. Assume there are 30 days in every month and 360 days per year. Ignore compounding when working with the interest rates. Part 1 What is the expected profit from the trade after 4 months (in $)?