International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Suppose, Company ABC is U.S. based company and has a British subsidiary. It is expected that the subsidiary will send 10 million pounds in two months to the Company. Thus, Company ABC is concerned that in the next two months the pound will depreciate in value
i) Why did Company ABC entered into the currency forward contract by taking short position?
ii) Suppose the Forward rate of the pound is $1.357 per pound, and the contract will expire after two months. At delivery/settlement date (two months later), the spot exchange rate is $1.2375 per pound. After two months, how much will Company ABC receive in dollars
iii) In the case of cash settlement, how much will Company ABC receive from the dealer?
iv) A Firm buys an FRA on 90-day LIBOR expiring in 30 days with Notional principal of $20 million. The contract rate is 10%. If at expiration, LIBOR is 8%, how much will the long has to pay to the short i.e., seller of FRA. What happens if, at expiration, LIBOR is 12%?
A British firm will receive $1 million from a U.S. customer in three months. The firm is considering two strategies to eliminate its foreign exchange exposure. The first strategy is to pledge the $1 million as collateral for a three month loan from a U.S. bank at 4 percent interest. The U.K. firm will then convert the proceeds of the loan to pounds at the spot rate. When the loan is due, the firm will pay the $1 million balance due by handing its U.S. receivable over to the bank. This strategy allows the U.K. firm to “monetize” its receivable immediately. The spot exchange rate is 0.6550 pounds per dollar. The second strategy is to enter a forward contract at an exchange rate of 0.6450 pounds per dollar. This ensures that the U.K. firm will receive £645,000 in three months. If the firm wanted to monetize this payment immediately, it could take out a three-month loan from a U.K. bank at 8 percent, pledging the proceeds of the forward contract as collateral. Which of…
A UK importer contracts to pay 18 million Yen for raw material from a supplier in Japan on one month's credit. The importer arranges with his bank to cover the transaction in sterling on the forward exchange market.
The following rates are quoted to him (in Yen/£):
Spot rate 247.45 - 247.75
1 month forward 248.00 – 248.80
What will be the cost of the shipment in sterling?
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