Galina Works trades regularly with customers in different countries. Its home currency is the dollar. The company expects to receive 1.6 million euros in six months’ time from a foreign customer. Current exchange rates in the home country of Galina Works are as follows: Exchange rate Euro Per dollar Spot 0.9431-0.9456 6-month forward 0.9360- 0.9394 12-month forward 0.9368-0.9406 Required: a) Calculate the rate of forward premium of the euro on the 12-month forward exchange rate both for buying and selling rates. b) Assuming that a forward contract is the only hedging tool available in the home country of Galina Works, calculate the dollar receipts of the 1.6 million euros receivable from the foreign customer under a hedge condition. c) If the current spot rate at the end of 6 months is 1 dollar = Euros 0.9325-0.9400, comment on Galina Works hedging decision. d) Discuss whether Galina Works should avoid exchange rate risk by invoicing foreign customers in dollars. e) Explain to Galina Works how, in respect of foreign sales, discounting and factoring can be used as hedging tools to manage foreign currency risk.
Galina Works trades regularly with customers in different countries. Its home currency is the dollar. The company expects to receive 1.6 million euros in six months’ time from a foreign customer. Current exchange rates in the home country of Galina Works are as follows:
Exchange rate Euro Per dollar
Spot 0.9431-0.9456
6-month forward 0.9360- 0.9394
12-month forward 0.9368-0.9406
Required:
a) Calculate the rate of forward premium of the euro on the 12-month forward exchange rate both for buying and selling rates.
b) Assuming that a forward contract is the only hedging tool available in the home country of Galina Works, calculate the dollar receipts of the 1.6 million euros receivable from the foreign customer under a hedge condition.
c) If the current spot rate at the end of 6 months is 1 dollar = Euros 0.9325-0.9400, comment on Galina Works hedging decision.
d) Discuss whether Galina Works should avoid exchange rate risk by invoicing foreign customers in dollars.
e) Explain to Galina Works how, in respect of foreign sales, discounting and factoring can be used as hedging tools to manage foreign currency risk.
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Thanks for answering my question. But I'm still struggling to identify which is buying and selling rates. Is the buying rate always on the right or it depends?
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