U.K.-based OSA has an expected expense of 20 million due in one year. Actual expenses might be

Question:

U.K.-based OSA has an expected expense of ‚¬20 million due in one year. Actual expenses might be as low as ‚¬15 million or as high as ‚¬25 million. The expected future spot rate is E[S₁^£/‚¬] = $0.6000/‚¬. OSA wants to hedge the expected euro expense with a one-year ‚¬20 million euro forward contract.

a. Draw OSA€™s underlying transaction on a time line using a minus sign (€“) to indicate a cash outflow and a plus sign (+) to indicate a cash inflow.

b. Draw OSA€™s risk profile in levels (V^£/‚¬ versus S^£/‚¬) and in percentage changes (v^£/‚¬ versus s^£/‚¬).

+£060E 060€ 0.00E 4060E

U.K.-based OSA has an expected expense of ‚¬20 million due

c. How much does OSA expect to owe in one year at each of the following exchange rates?

S^£/‚¬ = £0.50/‚¬

S^£/‚¬ = £0.70/‚¬

d. Complete the following table assuming an exchange rate of £0.60/‚¬ and uncertain expenses. Use a minus sign (€“) to indicate a cash outflow and a plus sign (+) to indicate a cash inflow.

U.K.-based OSA has an expected expense of ‚¬20 million due

e. Complete the following table assuming actual expenses of ‚¬15 million and an uncertain exchange rate. Use a minus sign (€“) to indicate a cash outflow and a plus sign (+) to indicate a cash inflow.

U.K.-based OSA has an expected expense of ‚¬20 million due

f. Complete the following table assuming actual expenses of ‚¬25 million and an uncertain exchange rate. Use a minus sign (€“) to indicate a cash outflow and a plus sign (+) to indicate a cash inflow.

U.K.-based OSA has an expected expense of ‚¬20 million due

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...