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13 November, 09:00

Your firm is a U. K.-based importer of bicycles. You have placed an order with an Italian firm for €1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a pound-denominated receivable with a one-year maturity.

Contract Size Country U. S. $ equiv. Currency per U. S. $

£ 10,000 Britain (pound) $ 1.9600 £ 0.5102 interest APR

12 months forward $ 2.0000 £ 0.5000 rates

€ 10,000 Euro $ 1.5600 € 0.6410 i$ = 1 %

12 months forward $ 1.6000 € 0.6250 i€ = 2 %

SFr. 10,000 Swiss franc $ 0.9200 SFr. 1.0870 i£ = 3 %

12 months forward $ 1.0000 SFr. 1.0000 iSFr. = 4 % The following were computed without rounding. Select the answer closest to yours.

A. £803,721.49

B. €800,000

C. £780,312.13

D. £72,352.94

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Answers (1)
  1. 13 November, 09:29
    0
    (A) £803,721.49

    Explanation

    ==> Present value of €1,000,000 = 1000000/1.02 = €980,392.16

    ===> Converting Euro into US Dollar using spot exchange rate

    €980,392.16*1.56 = $1,529,411.77

    ===>Converting US Dollar into Pounds using spot exchange rate

    $1,529,411.77/1.96 = £780,312.13

    ===> investing this amount in UK

    ==>the amount of €1,000,000 is collected from French firm and it is used to repay the Euro loan

    Step - 5 maturity value of pounds investment is received

    £780,312.13 * 1.03 = £803,721.49

    Therefore the answer is £803,721.49
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