Kurt plc is an Irish manufacturing company of luxury professional shampoo which has recently won a contract at an international trade fair to supply an American company with 5,000 units of its product at a price of $50 per unit.

Kurt plcs manufacturing plant is operating at full capacity and it has been necessary to source supplies from an English company which it has worked with in the past. Kurt plc will pay the English supplier 140,000 for the contract.

Today is the 1^st January and Victor plc will receive the $ income from the American customer in three months time. The Sterling payment must be made to the English supplier in two months time.

The following information is available today:

Exchange Rates

$/ Sterling/

Spot $1.16 $1.20 0.70 0.73

2 Month Forward 2c premium 3c premium 1p discount 1p discount

3 Month Forward 4c premium 5c premium 2p discount 3p discount

Interest Rates (Annual)

Economy Depositing Borrowing

Ireland 2% 3%

U.S. 1% 2%

U.K. 3% 5%

Requirement:

QUESTION 1. What is the FEC rate to be used to calculate the forward exchange contract payment of 140,000?

Question 2: What is the FEC rate to be used to calculate the forward exchange contact receipt of $250,000?

Question 3: What is the euro value of the 140,000 payment using FEC method?

Question 4: What is the euro value of the $250,000 receipt using FEC method?

Question 5: What is the potential profit of the contract if you use FEC as the hedge?

Q6: If you were to use money market to hedge the $250,000 receipt what would be the interest rate for the 3 months? (Number only, do not put % sign in)

q7: What would be the dollar value for the borrowed amount in step 1 of the money market process?

Q8: What is the euro value of the converted amount in euros in step 2 of the money market process?

Q9: What amount will you earn on your euro deposit in step 3 of the money market process?

Q10: What is the final euro value of the $250,000 receipt if you use money market process?

Question 11. What is the potential profit of the contact if you use money market to hedge the $250,000 receipt and you use FEC to hedge the 140,000 payment?(number only)