Question
Its products are marketed all over the England and in many parts of continental Europe as well. XYZ generally invoices in sterling when it sells
Its products are marketed all over the England and in many parts of continental Europe as well. XYZ generally invoices in sterling when it sells to foreign customers in order to guard against adverse exchange rate changes. Nevertheless, it has just received an order from a large wholesaler in central France for 320,000 of its products, conditional upon delivery being made in three months time and the order invoiced in euros. Company controller is concerned with whether the sterling will appreciate versus the euro over the next three months, thus eliminating all or most of the profit when the euro receivable is paid. He thinks this is an unlikely possibility, but he decides to contact the firms banker for suggestions about hedging the exchange rate exposure. He learns from the banker that the current spot exchange rate is / is 1.4537, thus the invoice amount should be 465,184. He also learns that the three-month forward rates for the pound and the euro versus the U.S. dollar are $1.8990/1.00 and $1.3154/1.00, respectively. The banker offers to set up a forward hedge for selling the euro receivable for sterling based on the / forward cross-exchange rate implicit in the forward rates against the dollar. What would you do if you were Company controller?
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