question: According to the financial and market information given above, what the U.S. firm can do to avoid transaction exposures by forward market hedge? (not less than 200 words)
Example A U.S. Firm are expected to sell the equipment to a British firm for the value of 1 million. The sale is made in March with payment due three months later in June. The following are the financial and market information for the analysis of currency exposure problem. - Spot exchange rate: $1.7640/f - Three-month forward rate: \$1.7540/ - U.S. firm's cost of capital: 12.0% - U.K. Three-month borrowing interest rate: 10.0% ( or 2.5% quarter ) - U.K. Three-month investment interest rate: 8.0% ( or 2.0% quarter ) - U.S. Three-month borrowing interest rate: 8.0% ( or 2.0% quarter ) - U.S. Three-month investment interest rate: 6.0% ( or 1.5% quarter ) - June put option in the over-the-counter ( bank) market for 1 million; strike price $1.75 ( nearly at-the-money ); 1.5% premium. - U.S. firm's foreign exchange advisory service forecasts that the spot rate in three months will be $1.76/. U.S. firm determined that it's minimum acceptable margin was at a sales price of $1,700,000. The budget rate, the lowest acceptable dollar per pound exchange rate, was therefore established at \$1.70/. Any exchange rate below this budget rate would result in U.S. firm actually losing money on the transaction. The following four options are available to U.S. firm to manage the exposure: - Remain unhedged - Hedge in the forward market - Hedge in the money market - Hedge in the options market Assignment: According to the financial and market information given above, what the U.S. firm can do to avoid transaction exposures by forward market hedge? (not less than 200 words) Example A U.S. Firm are expected to sell the equipment to a British firm for the value of 1 million. The sale is made in March with payment due three months later in June. The following are the financial and market information for the analysis of currency exposure problem. - Spot exchange rate: $1.7640/f - Three-month forward rate: \$1.7540/ - U.S. firm's cost of capital: 12.0% - U.K. Three-month borrowing interest rate: 10.0% ( or 2.5% quarter ) - U.K. Three-month investment interest rate: 8.0% ( or 2.0% quarter ) - U.S. Three-month borrowing interest rate: 8.0% ( or 2.0% quarter ) - U.S. Three-month investment interest rate: 6.0% ( or 1.5% quarter ) - June put option in the over-the-counter ( bank) market for 1 million; strike price $1.75 ( nearly at-the-money ); 1.5% premium. - U.S. firm's foreign exchange advisory service forecasts that the spot rate in three months will be $1.76/. U.S. firm determined that it's minimum acceptable margin was at a sales price of $1,700,000. The budget rate, the lowest acceptable dollar per pound exchange rate, was therefore established at \$1.70/. Any exchange rate below this budget rate would result in U.S. firm actually losing money on the transaction. The following four options are available to U.S. firm to manage the exposure: - Remain unhedged - Hedge in the forward market - Hedge in the money market - Hedge in the options market Assignment: According to the financial and market information given above, what the U.S. firm can do to avoid transaction exposures by forward market hedge? (not less than 200 words)
