Calculate net proceeds in sterling under each alternative

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An exporter in the UK has invoiced a customer in the USA the sum of $300,000 receivable in one year's time. He has under consideration two methods of hedging his exchange risk:

a. by borrowing an appropriate amount now for one year, converting the amount into sterling, and repaying the loan out of the eventual receipts.

b. by entering into a 12-month forward exchange contract to sell the $300,000

The sterling-US dollar spot rate is 1.8190-1.8402.

The 12-month forward rate of dollars against sterling is 1.7703-1.7915. Interest rates for 12 months are USA 6.65% UK 9.25%.

You are required to calculate the net proceeds in sterling under each alternative and suggest which is the better alternative.

Reference no: EM133495872

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