You are a sales manager for International Communications (IC) and export cellular phones to other countries. You have just signed a deal to ship phones to a British distributor. Your accounts are denominated in US dollars and this deal is denominated in pounds. You will receive 700,000 when the phones arrive in London in 180 days. Assume that you can borrow and lend at 7% p.a. in U.S. dollars and at 10% p.a. in British pounds. Both interest rate quotes are for a 360-day year. The spot exchange rate is $1.4945/, and the 180-day forward exchange rate is $1.4802/.

a. Describe the nature and extent of your transaction foreign exchange risk. (3 marks)

b. Describe two ways of eliminating the transaction foreign exchange risk based on the information provided.(3 marks)

c. Which of the alternatives in part b is superior? (5 marks)

d. Assume that the dollar interest rate and the exchange rates are correct. Determine what sterling interest rate would make your firm indifferent between the two alternative hedges. (3 marks)