need help for Fina2004 International Financial Management

Part 1 1ou work for an exporter based in the USA called Football Kit Corporation. On 1 September 2020 Football Kit received an order to send 500,000 Euros of merchandise to a company in France called Un Football pour Tous and be paid a "lump-sum" settlement on 1 December 2020 in Euros. You are worried that when you receive the Euro payment the exchange rate will be unfavourable. You lock into a 3 month forward "sell" with your bank on 1 September 2020 enabling you to sell 500,000 Euros on 1 December 2020 at a rate of 86 Euro cents for 1 USD. The spot rate on 1 September 2020 was 85 Euro cents but your fear was that the rate could be as high as 88 Euro cents on 1 December 2020 due to your observation that interest rates in the USA are rising faster than those in Europe. You predict that trend will continue until at least the end of November 2020 and that there be no change in the relativity of real wages between Europe and the USA and no change in inflation rates in Europe and the USA.

On 1 December 2020 you deliver the goods successfully to the French customer and your bank receives 500,000 Euros on the same day. The spot rate on that day turned out to be 85 Euro cents.

Questions:

1. How much in USD will the exporter's bank credit to the bank account of the exporter on 1 December 2020? (3 marks)
2. How much will be lost/gained versus the 85 Euro cents spot that existed on 1 December 2019? (3.5 marks)

Part 2: On 30 September 2020 the goods in Part 1 above are destroyed in a fire in a transit warehouse on their way to France. You say to your customer that you can quickly dispatch replacement goods for no change in price. On 1 October 2020 you receive a message from your customer that they will instead source similar goods from another supplier. On that same day you ring your bank and find a way to offset/liquidate the existing currency derivative. You contract a 2 month forward "buy" to buy 500 000 Euros at 85.5 Euro cents per USD on 1 December 2020.

Questions: On 1 December 2020

1. Will the exporter's bank account be debited or credited? (2 marks)
2. By how much? (4.5 marks)

Part 3: When you were thinking through the action to take on 1 September 2020 your fear was that a strengthening USD would hurt your employer's export business so that when it got paid in Euros it would lose on the conversion back to USD. As the business is based in the USA and all its expenses are in USDs, a hit to revenue from exports due to an exchange rate change could be damaging.

Propose 2 other methods the exporter could have deployed in place of the "selling" the 3-month forward. Demonstrate with numbers. Exclude from your thinking the possibility of "selling" the 3-month currency future. Also assume Football Kit Corporation has no subsidiary in Europe that could have used the Euro receipts generated from the exports of the parent.

There is a maximum of 9 bonus marks on offer if, in addition to the 2 methods above, you propose a collar and fully explain how the mechanism would work. (11 marks + 9 bonus)

Part 4: If you used a currency option or a collar in Part 3 as a means of de-risking the situation, spell out the advantages and the disadvantages of ONE of those methods and use numbers to demonstrate. (9 marks)

Part 5: Assuming the 1 Dec 2020 spot was at the following levels, and the export goods arrived in Europe on time and without mishap, summarize the cash flows under the 3 methods demonstrated in this assignment (excluding a collar) that could be deployed and also if no currency risk management had been attempted.

1. a)1 USD = 0.84 Euros = 84 Euro cents
2. b)1 USD = 0.89 Euros = 89 Euro cents

If you would also care to demonstrate cash flows involved in the collar you had a possibility of introducing in part 4, a further 6 bonus points are achievable. (17 marks + 6 bonus)