SECTION D: QUESTION FOUR

Oseas Plc has used an Australian supplier for the first time and must pay A$750,000 in six months time on 30^th November. The finance director is concerned that the cost of these supplies may rise in terms, as the Australian dollar appears to be strengthening against sterling and has decided to hedge the exchange risk (Oseas Plc has no excess cash at this time). Current data regarding rates available is as follows:

Current spot rate (A$/): 1.996 2.000

Six months forward rate (A$ /): 1.975 1.983

Money market rates available to Oseas Plc:

Borrowing Deposit

One-year interest rates: 61% 54%

One-year A$ interest rates: 40% 35%

REQUIRED

1. Evaluate whether a money market hedge, a forward market hedge or a lead payment should be used to hedge the foreign account payable.

7. marks)

2. Given the following information, consider if Oseas Plc would have benefitted from the use of options, and discuss the circumstances under which an option would be the best strategy to employ. Clearly show any workings to support your answer:

Over the Counter (OTC) Options

Written in London

November 2020 call options

Strike price $1.979

Premium in pence per $, 0.5

Actual exchange rate was A$1.94

6. marks)

3. Critically discuss transaction and economic risks and the impact that they have on both national and international trade.