Question

A merchant in the UK has agreed to sell goods to an importer in the USA at an invoiced price of $150,000. Of this amount, $60,000 will be payable on shipment. $45,000 one month after shipment and $45,000 three months after shipment. The quoted foreign exchange rates ($ per £) at the date of shipment are as follows:- Spot One month Three month 1.690 - 1.692 0.30 - 0.20 cents premium 1.0 - 0.80 cents premium The merchant decides to enter into appropriate forward exchange contracts through his bank to hedge these transactions. Calculate the sterling amount that the merchant will receive. (8 marks)

Answer 1

Sterling received upfront = $60,000/1.692 = 35,460.99

Sterling received in 1 month = $45,000/(1.692+.20) = 23,784.36

Sterling received in 3 months = $45,000/(1.692+0.80) = 18,057.78

Total sterling received by merchant = 35,460.99 + 23,784.36 + 18,057.78 = 77,303.13