Reference no: EM132955380
A merchant in the UK has agreed to sell goods to an importer in the USA at an invoice price of $ 150,000 of the amount $60,000 will be payable on shipment, $ 45,000 one month after shipment and $ 45,000 three months after shipment. The quoted foreign exchange rates ($/£) at the date of shipment are as follow
Spot 1.640 - 1.692
One month 1.687 - 1.690
Three months 1.680 - 1.684
The merchant decides to enter into appropriate forward exchange contracts through his bank to hedge these transactions.
Required:
Problem 1: State what are the presumed advantage of doing this
Problem 2: Calculate the sterling amount that a merchant would receive
Problem 3: Comment on the wisdom of hedging in this instance assuming that the spot rates at the dates of receipt of the two installments of $ 45,000 were as follows:
First installment 1.694 - 1.696
Second installment 1.700 - 1.704
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