Imperial Tasty Treats is a British food firm that has just signed a contract to sell haggis to a US firm. The firm will receive $250,000 in March and is

Imperial Tasty Treats is a British food firm that has just signed a contract to sell haggis to a US firm. The firm will receive $250,000 in March and is considering hedging this exposure with futures contracts. The subsequent table shows the spot and futures rates for February and March:

a. Design and describe a futures-based hedging strategy for Imperial Tasty Treats.

b. What would be the final cash flows of the previously described hedging strategy?

Solutions

Expert Solution

The firm will received euros, and needs to sell the euros after the payment is received. The base currency of the futures contract is euros. Hence, the firm will sell the futures to hedge its receivables.

Number of futures contract to sell = amount receivable in euros / size of each futures contract

Number of futures contract to sell = 250,000 / 125,000

= 2.

Net amount received in $ = number of futures contracts sold * contract size * future rate

Net amount received in $ = 2 * 125,000 * 1.23

Net amount received in $ = $307,500

The final cash flow is $307,500.

a. The firm will received euros, and needs to sell the euros after the payment is received.

b. The final cash flow is $307,500.

Junaid answered 1 year ago

Next > < Previous

Related Solutions

1. Boeing just signed a contract to sell a Boeing 787 aircraft to British Airways. British...

1. Boeing just signed a contract to sell a Boeing 787 aircraft to British Airways. British Airways will be billed £26 million which is payable in one year. The current spot exchange rate is $1.40/£ and the one-year forward rate is $1.43/£. The annual interest rate is 6.0% in the U.S. and 5.0% in UK. The premium for a one-year put or call option with the exercise rate of $1.43/£ is 1%. Boeing is concerned with the volatile exchange rate...

Boeing just signed a contract to sell a Boeing 737 aircraft to British Airways and will...

Boeing just signed a contract to sell a Boeing 737 aircraft to British Airways and will receive £50 million in six months. The current spot exchange rate is $1.3030/£ and the six-month forward rate is $1.3100/£. Boeing can buy a six-month put option on the British pound with an exercise price of $1.3500/£ for a premium of $0.0542/£. Currently, the six-month interest rate is 1.450 percent per annum in the United States and 0.410 percent per annum in France. Boeing...

Information: Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a...

Information: Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you...

Trident is a US company that sells goods to crown, a British firm in March for...

Trident is a US company that sells goods to crown, a British firm in March for Sterling pounds 1,000,000. Payments are due in three months that is June. Trident cost of capital is 12%. The following quotes are available: a. spot exchange rate: $1.7640/pound b. Three month forward rate: $1.7540/pound c. UK 3 month borrowing interest rate is 8% p.a (or 2% per quarter) d. US 3 month rate is 8% p.a (or 2% per quarter) e. US 3 month...

Boeing just signed a contract to sell a Boeing 737 aircraft to Air France and will...

Boeing just signed a contract to sell a Boeing 737 aircraft to Air France and will receive €200 million in six months. The current spot exchange rate is $1.2400/€ and the six-month forward rate is $1.26000/€. Boeing can buy a six-month put option on the Euro with an exercise price of $1.2500/€ for a premium of $0.030/€. Currently, the six-month interest rate is 2.40% per annum in the United States. Boeing believes that the Euro would likely appreciate from its...

AMC has just signed a contract. The contract requires an initial investment of $5 million, and...

AMC has just signed a contract. The contract requires an initial investment of $5 million, and creates positive cash flows of $2 million one year from today, $1.5 million two years from today, and $2.5 million three years from today. What is the value of this contract AMC can earn 9 percent on its money?

Your firm employs 10 employees. You have just signed a new contract to construct a small...

Your firm employs 10 employees. You have just signed a new contract to construct a small store in a local city. However, due to the coronavirus pandemic, you are experiencing supply chain problems relative to your raw materials. Discuss in detail how you would approach this problem.

You have just signed a 5-year contract with the ABB Group, a world-famous Engineering Consulting firm....

You have just signed a 5-year contract with the ABB Group, a world-famous Engineering Consulting firm. Your compensation includes a $10,000 signing bonus payable today and monthly payments of $6000 at end of the month and an additional $10,000 completion bonus at the end of year 5. Your salary and bonuses are invested in a savings account that pays 4% compounded monthly. a) What is the present value of this contract? b) You plan to put both the signing bonus...

Alcoa, a U.S. firm, has signed a contract to purchase goods from a manufacturer in Germany...

Alcoa, a U.S. firm, has signed a contract to purchase goods from a manufacturer in Germany for €5,000,000. The purchase was made in June with payment due six months later in December. The following market quotes are available: o The spot exchange rate is $1.20/€ o The six month forward rate is $1.21/€ o The Euro zone 6-month borrowing rate is 7% o The Euro zone 6-month deposit rate is 5% o The U.S. 6-month borrowing rate is 6% o...

Margaret Putter is a professional golfer who has just signed a $3 million contract. The terms...

Margaret Putter is a professional golfer who has just signed a $3 million contract. The terms are five annual payments of $600,000 each. Determine the present value of the contract to Margaret, assuming her interest rate is 5%.

Subjects