4. Payless Shoes has a shoe contract with a Hong Kong customer. Payless Shoes will pay...

4. Payless Shoes has a shoe contract with a Hong Kong customer. Payless Shoes will pay 30 million Hong Kong dollars (HK$) and is due in three months. The current spot and 3-month forward exchange rates are $0.13/HK$. a. Draw Payless’ expected future cash flow in Hong Kong dollars on a time line. b. Form a forward market hedge. c. Indicate how the hedge eliminates foreign exchange exposure by identifying the forward contract’s cash inflows and outflows on a time line. d. Indicate how the hedge eliminates foreign exchange exposure using the payoff profile graph.

Solutions

Expert Solution

1. Expected future cash flow in HK$ = 30 million Hong Kong $.

2. Total cost if in forward market hedge = $3.9 million.

jeff jeffy answered 1 year ago

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