Question
NEED HELP WITH WORK SHOWN PLEASE 1. (12 points) A U.S. company exported computers to UK and the contract value of 10,000 will be received
NEED HELP WITH WORK SHOWN PLEASE
1. (12 points)
A U.S. company exported computers to UK and the contract value of 10,000 will be received in 6 months. The US exporter is considering either using forward contract or money market instruments to hedge the foreign exchange risk. Based on the following market information, answer the following questions:
Spot exchange rate$1.50/
Six-month forward exchange rate$1.45/
6-month $ interest rate3%per year
6-month interest rate4%per year
Note: the interest rates are per annum, and has to be adjusted to 6 months.
1.1 How to hedge with forward contract? Choose the right answer below: (2 points)
A: Buy 10,000 forwardorB: Sell 10,000 forward
1.2 What is the dollar revenue for the exported computers if the foreign exchange rate risk is hedged with forward contract? (2 points)
1.3 How to hedge the foreign exchange risk with monetary market instruments? (Note: to get full points, pleasedescribe the proceduresANDcalculate the dollar revenue for the exported computers if the foreign exchange risk is hedged with money market instruments.) (6 points)
1.4. Which hedging method is preferred? Choose your answer below. (2 points)
A: Forward hedgeorB:Money market hedge
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