Question

Maria Gonzalez and Ganado.

Ganado the ?U.S.-based company discussed in this chapter—has concluded another large sale of telecommunications equipment to Regency? (U.K.). Total payment of ?£3,000,000 is due in 90 days. Maria Gonzalez has also learned that Ganado will only be able to borrow in the United Kingdom at 14.681?% per annum? (due to credit concerns of the British? banks). Given the exchange rates and interest rates in the popup? window, compare alternate ways below that Ganado might hedge its foreign exchange transaction exposure. Assume a? 360-day financial year.

a. How much in U.S. dollars will Ganado receive in 90 days without a hedge if the expected spot rate in 90 days is the same as the current spot rate of ?$1.761?/£?? The?90-day forward rate of ?$1.7510?/£?? The expected spot rate of?$1.780?/£??

b. How much in U.S. dollars will Ganado receive in 90 days with a forward market? hedge?

c. How much in U.S. dollars will Ganado receive in 90 days with a money market? hedge???

d. How much in U.S. dollars will Ganado receive in 90 days with an option market? hedge?

e. What transaction exposure hedge is now in? Ganado's best? interest?

Answer 1

Solution for the expected spot and forward rate has been provided. Kindly provide the US interest rate for evaluation of money market hedge and option prices for evaluation of option hedge.