6QQMN566 Question 1 Assume that the current date is 31 March 2024. You work in the finance team at Padd Shoes Ltd (Padd), a footwear manufacturer and retailer based in the UK. You have been given two tasks to deal with: Task 1 Padd's chief executive has been contacted by the managing director of a large Indian retailer, DS, who feels that Padd's footwear would sell well in India because, in her words, "Padd's styles are attractive to our consumers, UK brands are generally highly regarded here in India and our country has a growing middle class with enhanced spending power". It has been agreed that, to test the market, Padd will send a large consignment of footwear to DS for sale in its shops across India. The price for this consignment is 200 million Indian rupees (INR), which will be payable by DS on 30 June 2024. Padd's board is aware that the Indian rupee has weakened against sterling by almost 2% in the past six months and so it wishes to explore whether to hedge this sale to DS. In addition, because Padd has not traded outside of the UK before, its board has some more general concerns about trading abroad. You have been asked to prepare advice for the board and have obtained the following information at the close of business on 31 March 2024: Spot rate (INR/) Sterling interest rate (lending) Sterling interest rate (borrowing) INR interest rate (lending) INR interest rate (borrowing) Three-month OTC currency call option on INR - exercise price Three-month OTC currency put option on INR - exercise price Three-month forward rate discount (INR/) Cost of relevant OTC currency option Cost of forward contract 94.0625 95.4930 3.2% pa 4.0% pa 4.2% pa 4.8% pa INR 94.7500/ INR 95.5500/ 0.1950 -0.2265 8,000 4,500 See Next Page