Baloon Plc is a UK company that has the following expected transactions:

One month: Expected receipt of $330,000

One month: Expected payment of $250,000

Three months: Expected receipt of $410,000

The companys finance director has collected the following information:

Spot rate: $1.6840 1.6842/

One month forward: 0.0019 0.0020 discount

Three months forward: 0.0036 0.0038 discount

Money market rates for the company at the present time are:

Borrowing Deposit

One year interest rate: 2.9% 2.6%

One year $ interest rate: 3.4% 3.1%

Note: Assume there are 360 days in a year.

(i) Calculate the expected sterling receipts in one month and in three months if the company chooses to hedge its transaction exposure using the forward market. (15 marks)

(ii) Calculate the expected sterling receipts in three months if the company chooses to hedge its transaction exposure using a money market hedge and comment on your findings in (i) and (ii). (20 marks)

(iii) Briefly explain how each of the following can be used to forecast future foreign exchange rates: (a) interest rates; (b) inflation rates. (20 marks)