Posted: February 7th, 2017
2. Intel has a receivable due in three months in the amount of £530,000. The current bid-ask quotes for the spot exchange rate are 1.70–1.80 $/£ and for the three month forward rate are 1.80–1.83 $/£. Three-month U.K. and U.S. interest rates are respectively 6.00% – 7.50% and 8.00% – 8.50 % per annum, compounded quarterly. Three months later the British Pound is quoted at 1.50–1.60 $/£.
a. If Intel decides not to hedge its pound exposures based on its forecasting of an appreciation of pound against dollars. What is the potential risk Intel are taking? b. If Intel decides to do contractual hedging, which one, forward or money market should be used today? (NOTE: You must show all steps for each hedge c. Given the spot rate in three months, which hedge is the best hedge? (NOTE: You must show all steps to compute ex post cost/benefit for each hedge )
3. Can you redo everything by thinking of this is an AP instead of AR? To hedge an AP, you have to choose the one with the LOWEST (not the highest one) dollar cost for a USD-based company. Also if you hedge with the option, the premium of the option should be added to, not subtracted from, your dollar cost.
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