- 10 Marks
FM – L2 – Q91 – Foreign Exchange Risk Management
Explain how a UK company can hedge USD payment risk using a forward contract and calculate the sterling cost in 3 months.
Question
A UK company, BrightHorizon Ltd, expects to pay $750,000 to a supplier in three months’ time. The following exchange rates are available for the dollar against sterling (GBP/USD):
| Spot | 1.8570 | 1.8580 |
| 3 months forward | 1.8535 | 1.8543 |
The company is concerned about a possible increase in the value of the dollar during the next three months and would like to hedge its FX risk.
Required:
(A) Explain how the exposure to currency risk might be hedged, and the amount that BrightHorizon Ltd will have to pay in sterling in three months’ time to settle its liability.
(B) Calculate EuroTech GmbH’s income in euros from settlement of the forward contract in two months’ time.
(C) Calculate the cost to StarCrest Inc of hedging its currency exposure with a forward contract.
Find Related Questions by Tags, levels, etc.
