Gotohell buys and sells regularly with customers worldwide. Its home currency is the dollar. The firm expects to receive €1.2 million in 6 months’ time from a customer abroad. Current exchange rates in the home country of Gotohell are: Exchange rate : Euros Per dollar Spot : 4.1780-4.2080 6-month forward : 4.2302- 4.2606 12-month forward : 4.2825-4.3132 Required: a) Calculate the rate of forward discount of the euro on the 6-month forward exchange rate both for buying and selling rate. b) Assuming that forward contract is the only hedging tool available in the home country of Gotohell, calculate, when compared to its current dollar value, the gain or loss which Gotohell will incur by taking out a forward exchange contract on the future receipt of euros. c) On the basis of your answer in (b), advise Gotohell on the desirability of this hedge. d) If the interest rate in the home country of Gotohell is 4% per year, calculate the implied annual interest rate in the foreign customer’s country, using the mid-spot and the mid-twelve-month forward exchange rate.
Gotohell buys and sells regularly with customers worldwide. Its home currency is the dollar. The firm expects to receive €1.2 million in 6 months’ time from a customer abroad.
Current exchange rates in the home country of Gotohell are:
Exchange rate : Euros Per dollar
Spot : 4.1780-4.2080
6-month forward : 4.2302- 4.2606
12-month forward : 4.2825-4.3132
Required: a) Calculate the rate of forward discount of the euro on the 6-month forward exchange rate both for buying and selling rate.
b) Assuming that forward contract is the only hedging tool available in the home country of Gotohell, calculate, when compared to its current dollar value, the gain or loss which Gotohell will incur by taking out a forward exchange contract on the future receipt of euros.
c) On the basis of your answer in (b), advise Gotohell on the desirability of this hedge.
d) If the interest rate in the home country of Gotohell is 4% per year, calculate the implied annual interest rate in the foreign customer’s country, using the mid-spot and the mid-twelve-month forward exchange rate.
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