Royal Minty of Britain has purchased 20,000 ounces of silver from Silver Products at US$8.30, payable...

Royal Minty of Britain has purchased 20,000 ounces of silver from Silver Products at US$8.30, payable in 180 days. The current spot rate is 1.8127 ($US/£) and the 180-day forward is 1.7863. The CEO at Royal Minty suggests that the spot rate in six months time will be 1.7915. Interest rates in Britain are currently 4.70 percent for 180 days and 1.15 percent in the United States. a-1. Calculate the receipts if Royal Minty takes a chance on the spot rate. (Round the final answer to the nearest whole pound.) Receipts £ a-2. Calculate the receipts if Royal Minty books a forward contract. (Round the final answer to the nearest whole pound.) Receipts £ a-3. Calculate the receipts if Royal Minty buys a money market hedge. (Round intermediate calculations and the final answer to the nearest whole pound.) Receipts £

Solutions

Expert Solution

Silver purchased = 20000 ounces

Rate = USD 8.30 / ounce

US$ Payable by Royal mint = Quantity of silver purchased * rate = 20000 * 8.30 = $ 166,000.

a-1

If Royal mint takes a chance at the spot rate, the transaction will be settled at spot rate in six months time i.e.at $1.7915/ Pound.

Outflow in Pound= amount payable in $/ spot exchange in 6 months time = 166000/ 1.7915 = Pound 92,659.78

= Pound 92,660 (approx.).

a-2

If Royal mint takes a forward contract, transaction will be settled at 180 day forward rate i.e. $ 1.7863/ Pound

Outflow in Pound= amount payable in $/ 180 days forward rate = 166000/ 1.7863 = Pound 92,929.52

= Pound 92, 930 (approx.)

a-3

If Royal mint buys a money market hedge where it has $ 166000 payable after 180 days, it will buy the present value of $ 166000 and invest it at 1.15% in USA.

To buy the dollars, it will convert pound into dollars at current spot rate of $ 1.8127/Pound, and the pound required will be borrowed by Royal mint at 4.70%

Hence, PV of $ outflow= 166000/1.0115 =$ 164,112.70

Pounds required to buy dollars as calculated above = dollars required/ spot exchange rate=164112.70/1.8127 = Pound 90,534.95

Pounds required will be borrowed at 4.70 %, hence outflow after 180 days of pound =Borrowings ( 1+ Interest Rate /100)

= 90534.95 (1+0.047) = Pounds 94,790.09=Pounds 94,790 (approx.)

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

Royal Minty of Britain has purchased 20,000 ounces of silver from Silver Products at US$8.30, payable...

please answer the following question. Thsnk you! Now we will compare the US to Britain from...

please answer the following question. Thsnk you! Now we will compare the US to Britain from a debt perspective. Research Britain’s national debt and the percent it is of their GDP. Also, research what percent of our GDP is our current debt. • Convert (showing me the conversion using unit analysis) Britain’s national debt from pounds, £, to US dollars, $, by researching out the current conversion rate. Be sure you show me how you accomplished your conversion, I actually...

On May 7, Roy, a minor, a resident of Smithton, purchased an automobile from Royal Motors,...

On May 7, Roy, a minor, a resident of Smithton, purchased an automobile from Royal Motors, Inc., for $18,750 in cash. On the same day, he bought a motor scooter from Marks, also a minor, for $750 and paid him in full. On June 5, two days before attaining his majority, Roy disaffirmed the contracts and offered to return the car and the motor scooter to the respective sellers. Royal Motors and Marks each refused the offers. On June 16,...

Your U.S. based company has purchased equipment from a German manufacturer worth €10,000,000 that is payable...

Your U.S. based company has purchased equipment from a German manufacturer worth €10,000,000 that is payable in one year. The current spot rate S(EUR/USD) is $1.13 and the F12(EUR/USD) is $1.1037. The US interest rate is 5 percent and the German interest rate is 7.5 percent. Additionally, a call to buy euros at a strike price $1.11 in 12 months has a premium of $0.0007 per euro and a put at the same strike price have a premium of $0.003....

Transaction exposure. International Products, Inc. has ordered 20,000 leather coats from Argentina for delivery in 3...

Transaction exposure. International Products, Inc. has ordered 20,000 leather coats from Argentina for delivery in 3 months. The contracted cost of a coat is 148 pesos. International Products will pay for the coats upon delivery. The current indirect exchange rate is $1 for 1.2381 pesos. The anticipated inflation rate is 4.3% in the United States and 6.9% in Argentina. In U.S. dollars, how much will the 20,000 leather coats cost International Products at delivery? 1)In U.S. dollars, how much will...

Joe purchases a ten year $20,000 corporate bond that has a coupon rate of 8% payable...

Joe purchases a ten year $20,000 corporate bond that has a coupon rate of 8% payable semiannually. Immediately after receiving the 12th dividend, Joe sells the bond to Schmoe at a price that gave Joe a 10.25% annual effective return on his investment. Schmoe keeps the bond until the end of its life. a) What is Joe’s selling price? b) What is Schmoe’s approximate annual effective return on his investment (yield)?

Your US Company has just purchased a large quantity of parts from a German company for...

Your US Company has just purchased a large quantity of parts from a German company for 2.0 million Euros. Your company will make the payment of 2.0 million Euros in 90 days. The current Spot rate on the EUR is $1.14 ($1.14/1 EUR) Your company has assumed that the expected spot rate on the EUR in 90 days will be the same as the spot price today (The expected change in the spot rate over the next 90 days is...

Question 1 A US company that has purchased inventory from a German supplier would be exposed...

Question 1 A US company that has purchased inventory from a German supplier would be exposed to a net exchange gain on the unpaid balance if a-The amount to be paid was denominated in dollars b-The Dollar weakened in relation to the Euro and the Euro was the denominated currency c-The Dollar strengthened relative to the Euro and the Euro was the denominated currency d-The company signed a forward contract for the purchase of Euros Question 2 When the affiliated...

In 2020, a company has an accounts receivable of $20,000 for products that were delivered to...

In 2020, a company has an accounts receivable of $20,000 for products that were delivered to the customer in 2020. It will be collected in 2021. The company has a tax rate of 30% and taxable income of $216,000 at the end of 2020. There were no deferred taxes at the beginning of 2020. What is the amount of income tax expense for 2020?

Zetix borrowed $20,000 on a one-year, 10 percent note payable from the local bank on March...

Zetix borrowed $20,000 on a one-year, 10 percent note payable from the local bank on March 1. Interest was paid quarterly, and the note was repaid one year from the time the money was borrowed. Requirements Calculate the amount of cash payments Zetix was required to make in each of the two calendar years that were affected by the note payable assuming accounting period ends on Dec. 31 each year.

Subjects