REQUIRED

Please give detailed step-by-step explanation and calculations as this question carries 6 marks

a)

(a) A merchant in the UK has agreed to sell goods to an importer in the USA at an invoice price of $130,000. Of this amount, $40,000 will be payable on shipment, $60,000 one month after shipment and $30,000 three months after shipment. The quoted foreign exchange rates ($ per ) at the date of shipment are as follows: The merchant decides to enter forward exchange contracts through his bank to hedge these transactions for fear that the future spot rates may change to his disadvantage. Comment on the wisdom of the merchant decision to hedge by comparing his total receipts in pound sterling, assuming the spot rate ($ per ) at the dates of receipt of first payment upon shipment remains the same but rates at the second instalment ($60,000) and third instalment ($30,000), were as follows: Spot rate (one month after shipment) 1.6941.696 Spot rate (three months after shipment) 1.7001.704 (b) Describe how foreign exchange transactions using futures would differ from those using forward exchange contracts. (2 marks) Hint: the bank always makes a profit on forex, by taking more of one currency in the exchange (a) A merchant in the UK has agreed to sell goods to an importer in the USA at an invoice price of $130,000. Of this amount, $40,000 will be payable on shipment, $60,000 one month after shipment and $30,000 three months after shipment. The quoted foreign exchange rates ($ per ) at the date of shipment are as follows: The merchant decides to enter forward exchange contracts through his bank to hedge these transactions for fear that the future spot rates may change to his disadvantage. Comment on the wisdom of the merchant decision to hedge by comparing his total receipts in pound sterling, assuming the spot rate ($ per ) at the dates of receipt of first payment upon shipment remains the same but rates at the second instalment ($60,000) and third instalment ($30,000), were as follows: Spot rate (one month after shipment) 1.6941.696 Spot rate (three months after shipment) 1.7001.704 (b) Describe how foreign exchange transactions using futures would differ from those using forward exchange contracts. (2 marks) Hint: the bank always makes a profit on forex, by taking more of one currency in the exchange