Your firm is a U. K.-based exporter of bicycles. You have sold an order to a Swiss firm for SFr. 1,000,000 worth of bicycles. Payment from the Swiss firm (in Swiss francs) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity. The following were computed without rounding. Select the answer closest to yours. A. £446,730.77 B. £464,874.41 C. £509,900.99 D. £500,000

Question

Porter

Business

17 November, 16:46

Your firm is a U. K.-based exporter of bicycles. You have sold an order to a Swiss firm for SFr. 1,000,000 worth of bicycles. Payment from the Swiss firm (in Swiss francs) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity. The following were computed without rounding. Select the answer closest to yours. A. £446,730.77 B. £464,874.41 C. £509,900.99 D. £500,000

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Answers (1)

Know the Answer?

Carissa Beard · Answer 1

The answer is £803,721.49

Explanation:

Solution:

Given that:

The first step is = The Present value of €1,000,000 = 1000000/1.02 = €980,392.16

The second step is to convert Euro into US Dollar using spot exchange rate

Now,

€980,392.16*1.56 = $1,529,411.77

Thus,

We Convert US Dollar into Pounds using spot exchange rate

so,

$1,529,411.77/1.96 = £780,312.13

The third step is to invest this amount in the united kingdom

The fourth step is, the amount of €1,000,000 is collected from Swiss firm and it is used to repay the Euro loan

The fifth step is = the maturity value of pounds investment is received

£780,312.13 * 1.03 = £803,721.49