International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Assume the following information:
180-day U.S. interest rate
8%
180-day British interest rate
9%
180-day forward rate of British pound
$1.50
Spot rate of British pound
$1.48
Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge.
a) Assume the following information:
180‑day U.S. interest rate = 8%
180‑day British interest rate = 9%
180‑day forward rate of British pound = $1.50
Spot rate of British pound = $1.48
Assume that a U.S. exporter will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge.
b) As treasurer of a U.S. exporter to Canada, you must decide how to hedge (if at all) future receivables of 250,000 Canadian dollars 90 days from now. Put options are available for a premium of $.03 per unit and an exercise price of $.80 per Canadian dollar (CA$). The forecasted spot rate of the CA$ in 90 days follows:
Future Spot Rate Probability (%)
$.75 50…
Which of the following reflects a hedge of net payables in British pounds by a U.S. firm?
Group of answer choices
a) purchase a currency call option in British pounds.
b) sell pounds forward.
c) borrower in US dollars, convert them to pounds, and invest them in a Britain.
A and C
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which of the following reflects a hedge of net payables on British pounds by a U.S. firm? A. sell a currency call option in British pounds. B. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit. C. sell pounds forward. D. purchase a currency put option in British pounds.arrow_forwardSelect each of the following strategies that can be used to hedge the foreign exchange risk of a British entity expecting to receive 1m INR in one year: Group of answer choices Borrowing GBP against the receivable, converting to INR, and investing the INR at Indian interest rates. Entering a long position in a forward contract on the INR. Entering a short position in a put on the INR. Entering a long position in a put on the INR. Borrowing INR against the receivable, converting to GBP, and investing the GBP at British interest rates. Entering a short position in a forward on the INR.arrow_forwardSuppose the spot rate of the yen today is $0.0100 while the three-month forward rate is $0.0096. How can a U.S. exporter who is to receive 350,000 yen in three month hedge its foreign exchange risk? What happens if the exporter does not hedge and the spot rate of the yen in three months is $0.0098?arrow_forward
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