Question 3 Part A Malfoy plc is a UK company that expects to receive $3,600,000 from a US customer in three months' time. Due to the size of the receipt, the company plans to minimise the risk of an adverse exchange rate movement through the use of a money market hede The following data regarding annual interest rates and the current spot rate is available US dollar (USD) British pound (GBP) 12 Month Borrowing 2.750 3.755 12 Month Lending 2.625 3.575 Spot rate (US$/) Required (a) Construct a money market hedge based on the information provided and calculate the expected receipt in GBP (), and the effective $/ forward rate. (7 marks) (b) Discuss two other methods of managing exchange rate risk and suggest scenarios in which they might be used. (5 marks) Part B Granger plc (Granger) is highly geared and is keen to manage its exposure to interest rate risk. A large portion of the company's borrowings is floating rate debt at LIBOR + 3% and Granger is considering hedging the interest rate to minimise risk. Granger's bank has offered the following hedging options: A forward rate agreement (FRA) at 4% interest A cap at 4% interest. There will be a premium cost of 1% per year for the cap The bank is prepared to buy a floor from Granger at 3.85% interest for a premium of 0.75% per annum. Assume that LIBOR is currently 0.75% but is expected to move to 1.25% Shortly Question continued overleaf ACF300 Page 5 of 8 Required Calculate, for BOTH the current and expected LIBOR rates, the effective interest rate that Granger will pay under each of the following: (1) No hedge, (ii) FRA, (iii) Cap and (iv) Collar Recommend which hedging method, if any, Granger should use assuming that LIBOR moves to 1.25%. (13 marks) (Total 25 marks)