Guidance over a foreign exchange transaction

Assignment Help Financial Management

Reference no: EM131576246

Ashton Ltd, a client to whom you provide financial advice has come to you for guidance over a foreign exchange transaction. The company, based in New Zealand has sold USD 2,000,000 of machine parts to a USA customer. The payment has been deferred for six months.

The following information is relevant:

Spot exchange rate = USD 0.85/NZD

Six month forward rate = USD 0.88/NZD

Company’s cost of capital = 12.0% p.a.

US 6-month deposit rate = 6.0% p.a.

US 6 month lending rate = 9.0% p.a.

New Zealand 6-month lending rate = 7.0% p.a.

New Zealand 6 month deposit rate = 5.0% p.a.

Forecasted inflation in New Zealand = 4.0% p.a.

Forecasted inflation in the USA = 8.0% p.a.

Required

1. Calculate the expected spot rate in 6 months assuming that the purchasing power parity between the two countries holds

2. Calculate the expected value of the sales proceeds in NZD using the expected spot rate computed in (a) above.

3. Calculate and value of the proceeds from the sale if the company enters into a forward rate agreement.

4. Explain and calculate the net proceeds receivable by Brian’s company if money market hedge is used.(Show workings)

5. Based on your calculations above, which alternative would you recommend and why?

Reference no: EM131576246

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