Question

Natasha Ltd is based in England and has imported goods from USA which have been invoiced for US Dollars 260, as payable in 3 months’ time. In addition, it has also exported finished goods to Singapore and Australia. The Singapore Customer has been invoiced in US Dallas (USD) 300 payable in four months’ time. Current spot and forward rates are as follows:

         Spot                                0.8870 – 0.8895

         3 months forward           0.8560 -0.8570

         Sterling pound/USD

         Spot                                17850-1.7961

         4 months forward           1.8220-1.8270

         Current money market rates (Per annum) are as follows:

         USD                   12%-14%

         ASD                   14%-16%

         Sterling pound    10%-12%

Required

Explain how the company can head its exposure to foreign exchange risk using:

i.       Forward markets                                                                                                2 marks

ii.      Money markets                                                                                                   2 marks

iii.     Which of the above two is the best hedging technique                                      2 marks

Answer 1