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Blowmaster, a Glasgow based company, is due to receive payment from an overseas customer of $30.1 million one year from today. Blowmaster is able to
Blowmaster, a Glasgow based company, is due to receive payment from an overseas customer of $30.1 million one year from today. Blowmaster is able to borrow and lend at the interest rates specified below. The table also contains information on current exchange rates Currenc One year interest rates 3.20%-4.15% 0.70%-1.75% | Spot rates One year forward exchange rates 1-$1.6025 1- $1.5618 -726 96 2.1 Blowmaster is concerned about the exchange rate risk. Explain how Blowmaster could hedge its currency exposure using either forward contracts or a money-market hedge (15 %) 2.2 Assuming that, at the end of the year, the spot rate has changed to -$1.5845 - 916. What will be the Sterling value of the $30.1m received, assuming no hedging (5 %) Continued overleaf... 2.3 Explain the Interest Rate Parity and Unbiased Forward Estimate exchange rate theories (13 %)
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