Explain why palmer ltd needs to hedge its account payable

Reference no: EM132139724

Question - Transaction exposure

Palmer Ltd is a British importer of computer chips. The company has contracted to purchase 4,000 units of chips at a unit price of 20 Swiss Franc from one Swiss company. Three month's credit is allowed to Palmer Ltd before payment is due. Palmer Ltd currently has no surplus cash, but can borrow short term at 2% above bank base rate or invest short term at base rate in either the United Kingdom or Switzerland.

Exchange Rates
	Swiss franc/£
Sport	2.96-2.98
1 month forward	2.945-2.975
3 months	2.925-2.955
Current Bank Base Rates
Switzerland	6% per annum
United Kingdom	10% per annum

(a) Explain why Palmer Ltd needs to hedge its account payable.

(b) Calculate the costs of hedging using

i. lead payment

ii. forward market hedge

iii. money market hedge

Which is the best alternative.

Reference no: EM132139724

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