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Example 15: Exporters Company, a UK company, is due to receive 500000 Northland dollars in 6 months' time for goods supplied. The company decides to
Example 15: Exporters Company, a UK company, is due to receive 500000 Northland dollars in 6 months' time for goods supplied. The company decides to hedge its currency exposure by using the forward market. The short term interest rate in the UK is 12% per annum and the equivalent rate in Northland is 15%. The spot rate of exchange is 2.5 Northland dollars to the UKP. You are required to calculate actually gains or losses as a result of the hedging transaction if, at the end of 6 months, the UKP, in relation to the Northland dollar, had (1) gained 4%, (ii) lost 2% or (iii) remained stable. You may assume that the forward rate of exchange simply reflects the interest differential in the two countries
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