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NMIMS
Master of
Business Administration - MBA Semester 4
International Finance
Q1. CQS plc is a UK company that sells goods
solely within UK. CQS plc has recently tried a foreign supplier in Netherland
for the first time and need to pay €250,000 to the supplier in six months’
time. You as financial manager are concerned that the cost of these supplies
may rise in Pound Sterling terms and has decided to hedge the currency risk of
this account payable. The following information has been provided by the
company’s bank:
Spot rate (€ per £): 1·998 ±
0·002
Six months’ forward rate (€ per £): 1·979 ± 0·004
Money market rates available to CQS plc:
Borrowing Deposit
One-year Pound Sterling interest rates: 6·1% 5·4%
One-year Euro interest rates: 4·0% 3·5%
Assuming CQS plc has no surplus cash at the
present time you are required to evaluate whether a money market hedge, a
forward market hedge or a lead payment should be used to hedge the foreign
account payable.
Answer. CQS plc should place sufficient Euros on
deposit now so that, with accumulated interest, the six-month liability of
€250,000 can be met. Since the company has no surplus cash at the present time,
the cost of these Euros must be met by a short-term Pound Sterling loan.
Six-month Euro
deposit rate = 3·5/2
= 1·75%
Q2. On 30th June 2009 when a forward contract
matured for execution you are asked by an importer customer to extend the
validity of the forward sale contract for US$ 10,000 for a further period of
three months.
Contracted Rate US$1 = Rs.41.87
The US Dollar quoted on 30.6.2009
Spot Rs. 40.4800/Rs. 40.4900
Premium July 0.1100/0.1300
Premium August 0.2300/0.2500
Premium September 0.3500/0.3750
Calculate the cost for your customer in
respect of the extension of the forward contract.
Rupee values to be rounded off to the nearest
Rupee.
Margin 0.080% for Buying Rate
Margin 0.25% for Selling Rate
Answer. This extension of forward Contract involves
following steps
· Cancel the contract at TT buying rate.
· Rebook the contract for three months
at the current rate of exchange.
Accordingly
Step 1: Cancel
the contract at TT buying rate on 30.6.2009
Rs.
Spot US$ 1 40.4800
Less: Margin
0.080% 0.0324
40.4476
Q3. Wenden Co is a Dutch-based company which
has the following expected transactions.
One month: Expected receipt of £2,40,000
One month: Expected payment of £1,40,000
Three months: Expected receipts of £3,00,000
The finance manager has collected the
following information:
Spot rate (£ per €): 1.7820
± 0.0002
One month forward rate (£ per €): 1.7829 ± 0.0003
Three months forward rate (£ per €): 1.7846 ± 0.0004
Money market rates for Wenden Co:
Borrowing Deposit
One year Euro interest rate: 4.9% 4.6%
One year Sterling interest rate: 5.4% 5.1%
Assume that it is now 1 April.
Required:
a. Calculate the expected Euro receipts in one
month and in three months using the forward market.
b. Calculate the expected Euro receipts in
three months using a money-market hedge and recommend whether a forward market
hedge or a money market hedge should be used.
Answer. a) Forward market evaluation
Net receipt in 1
month = £2,40,000 – £1,40,000 = £1,00,000
WendenCo needs to
sell Sterlings at an exchange rate of (1.7829 + 0.0003)= £1.7832 per €
Euro value of net
receipt = 1,00,000 / 1.7832 = €56,079
Receipt in 3
months
=
£3,00,000
Get fully solved
assignments.
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08894344452,
08728863595
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