Highspeed Electronics Limited has taken delivery of 50,000 electronic devices from an American company. The seller is
Question:
Highspeed Electronics Limited has taken delivery of 50,000 electronic devices from an American company. The seller is in a strong bargaining position and has priced the devices in American dollars at $12.00 each.
Highspeed Electronics Limited has been granted three months credit. Assume that interest rates in America are 3% per quarter (three months). Highspeed electronics Limited has all its money tied up in its operations but it could borrow in dollars at 3% per quarter if necessary.
Foreign exchange rates
US$ = Sh. 1
Spot 0.013
Three month forward 0.0154
A three month dollar call option for US$ 600,000 is available at a premium of US$15,000.
Required:
(i) Using suitable computations, illustrate two hedging strategies available to Highspeed Electronics Limited. (8 marks)
(ii) Distinguish between a currency option and a currency swap. (2 marks)
Expert Answer:
Managerial Accounting The Cornerstone Of Business Decision Making
ISBN: 9780357715345
8th Edition
Authors: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
