Hedge their risk of adverse currency fluctuation

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Reference no: EM132061229

An american company is commencing work in England and wants to hedge their risk of an adverse currency fluctuation. They submit a bid of (British Pounds) GBP 1.175 million and should recieve a Deposit of 10% GBP (117,500) due when accepted. The US company Planned on receiving GBP 1.0575 million April 14, 1986. To hedge this risk the US company can either sell pounds forward 90 days or secure 90 day pound loan. The loan would borrow pounds and exchange the proceeds into dollars at the spot rate. Then on April 13, would use its pound receipts to repay the loan. The loan would be 1.5% above UK prime rate.The business allowed for a profit margin of 6%. The calculations to obtain this profit margin were done on December 3, 1985.

January 14, 1986 Bid accepted:

Spot rate = USD 1.4370

Three month forward rate = USD 1.4198

Prime lending rate (UK) is 13.5%

December 3:

Spot rate = USD 1.482

Pound value at bid = 1,175,000

Questions 1:

On January 14, suppose the US company covers the 90% remaining pound payment to be received on April 14 by a three-month forward contract. a) State how much of which currency the US company should buy/sell and when. b) How many dollars will be received on April 14? Does this cover the total dollar cost?

Reference no: EM132061229

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