Stephenson Jacks, a UK company, has just signed a contract to sell passenger cars to an Egyptian importer for LE1400million. The transaction was done in January with payment to take place in July. Because this is a sizable contract for the firm and because the contract is inEgyptian pounds rather than British pounds, Stephenson Jacks is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a proper hedging decision, you have gathered the following information.
Spot rate (LE/£) 9.2723180-day forward rate (LE/£) 9.4211180-day British pound investment interest rate 5%p.a.180-day British pound borrowing interest rate 7%p.a.180-day Egyptian pound investment interest rate 8%p.a.180-day Egyptian pound borrowing interest rate 10%p.a.The current cost of capital of Stephenson Jacks 12%The company adviser expects that the future exchange rate in 180 days will be LE9.3655.
Required:Identify the various strategies Stephenson Jacks might use to hedge its foreign exchange transaction risk and evaluate their outcomes. Advise the company on its selection of an appropriate hedging strategy.