Question

In: Finance

AMan entersd into a contract with UK manufacturing company to deliver 25 trucks on 1st January...

AMan entersd into a contract with UK manufacturing company to deliver 25 trucks on 1st January 2019 payment to be made within two months from the date of delivery. The exchange rate in spot market on the date of transaction is OMR 0.47456 = 1 GBP. The total cost of 25 trucks amounts to GBP1, 250,000. The truck was delivered on 1st May 2019. Assuming that the forward contract price of OMR is at a forward premium of 7% for 1st July and the spot rate of OMR is expected to appreciate by 5% against GBP by July 2019.
a. Find out the amount of OMR to be paid by the dealer if he goes for forward contract.

b. Find out the amount of OMR to be paid by the dealer if he goes for actual price in July

c. If the dealer has an option to buy the GBP in July at 3 % depreciated value of OMR from
January spot rate with 5 % premium, should he accept the option. If he accepts the options find out the amount of OMR paid by him and the difference between option price and actual price

Solutions

Expert Solution

Cost of 25 trucks = GBP1,250,000

Current spot rate = OMR 0.47456 = 1 GBP

Forward contract price of OMR is at a premium of 7% , thus forward rate = 0.47456 * (100%-7%) = 0.441341

Spot rate of OMR expected to appreciate by 5% against GBP in Jul-19, thus expected spot rate in Jul'19 = 0.47456 * (100%-5%) = 0.450832

a. the amount of OMR to be paid by the dealer if he goes for forward contract.

Forward rate = OMR 0.441341/GBP

GBP value = GBP1,250,000

Amount of OMR = GBP1,250,000*0.441341 = OMR 551,676

b.the amount of OMR to be paid by the dealer if he goes for actual price in July

Expected spot rate in Jul'19 = OMR 0.450832/GBP

GBP value = GBP1,250,000

Amount of OMR = GBP1,250,000*0.450832= OMR 563,540

c.  If the dealer has an option to buy the GBP in July at 3 % depreciated value of OMR from January spot rate with 5 % premium, should he accept the option. If he accepts the options find out the amount of OMR paid by him and the difference between option price and actual price

Current spot price = OMR 0.47456 = 1 GBP or 2.10722 GBP (1/0.47456) per 1 OMR

Thus, Option price of GBP = current spot price * (100%+3%) = 2.10722*(103%) = 2.170432

Amount of OMR paid under option = GBP1,250,000/2.17043 = OMR 575,922.74

Difference between option price and actual price:

Actual price = GBP1,250,000 * current spot rate = GBP 1,250,000* 0.47456 = OMR 593,200

Option Price = OMR 575,922.74 + option premium = OMR 575,922.74 + (GBP1,250,000/2.17043*5%) = OMR 575,922.74 + OMR 28,796.14 = OMR 604,718

Since the option price is more than actual price and also the higher than the forward rate and the expected spot rate, the dealer should not go for the option.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

An Omani car dealer enters into a contract with German manufacturing company for purchase of 25...
An Omani car dealer enters into a contract with German manufacturing company for purchase of 25 cars on 1st February 2019 payment to be made within one month from the date of delivery. The exchange rate in spot market on the date of transaction is OMR 0.43556 = 1 EUR. The total cost of 25 cars amounts to Euro 625000. The car was delivered on 1st June 2019. Assuming that the forward contract price of OMR is at a forward...
You will receive $2,000 on January 1st 2004, on January 1st in 2005 and January 1st...
You will receive $2,000 on January 1st 2004, on January 1st in 2005 and January 1st 2006. Which of the following expressions will calculate your value at time of January 1st 2004? a PV = $2,000​[1.06]^-1 + $2,000​[1.06]^-2 + $2,000​[1.06]^-3 b PV = $2,000​[1.06]^1 + $2,000​[1.06]^2 + $2,000​[1.06]^3 c PV = $2,000​[1.06]^0 + $2,000​[1.06]^1 + $2,000​[1.06]^2 d PV = $2,000 + $2,000​[1.06]^-1 + $2,000​[1.06]^-2
On January 1, 2019, Fulton Inc. enters into a contract with Gibson to deliver goods. Gibson...
On January 1, 2019, Fulton Inc. enters into a contract with Gibson to deliver goods. Gibson pays $100,000 at the time the contract is signed, at which time the goods are transferred and Fulton’s performance obligation is complete. In addition, Gibson agrees to pay Fulton $100,000 on December 31, 2019, and December 31, 2020. If Fulton entered into a financing arrangement with Gibson it would charge an interest rate of 9%. Required: 1. Determine the transaction price for the contract...
On January 1, 2017, Fulton Inc. enters into a contract with Gibson to deliver goods. Gibson...
On January 1, 2017, Fulton Inc. enters into a contract with Gibson to deliver goods. Gibson pays $100,000 at the time the contract is signed, at which time the goods are transferred and Fulton’s performance obligation is complete. In addition, Gibson agrees to pay Fulton $100,000 on December 31, 2017, and December 31, 2018. If Fulton entered into a financing arrangement with Gibson it would charge an interest rate of 9%. Required: 1. Determine the transaction price for the contract...
On 1st January, 2016, a building materials manufacturing company in Oman purchased a farm land from...
On 1st January, 2016, a building materials manufacturing company in Oman purchased a farm land from the outskirts of Al Dhakliyah region. The cost of the property was OMR 675,000 and the company has made the settlement in full. The property tax of OMR 36,000 was due from the previous owner of the farm was paid by the company. All the legal costs relating to the acquisition of land was OMR 5,400. The old building in the farm land was...
Boris Company enters into a contract with Bella Company to manufacture, deliver, and install a specially...
Boris Company enters into a contract with Bella Company to manufacture, deliver, and install a specially made piece of machinery. The total contract price is $10,000,000. The contract provides that $5,000,000 must be paid to Boris when the machine is delivered and $5,000,000 must be paid when installation is complete. The junior accountant properly concluded that delivery of the manufactured machine and installation of the machine represent two separate performance obligations. The accountant properly allocated $1,000,000 of the contract price...
Boris Company enters into a contract with Bella Company to manufacture, deliver, and install a specially...
Boris Company enters into a contract with Bella Company to manufacture, deliver, and install a specially made piece of machinery. The total contract price is $10,000,000. The contract provides that $5,000,000 must be paid to Boris when the machine is delivered and $5,000,000 must be paid when installation is complete. The junior accountant properly concluded that delivery of the manufactured machine and installation of the machine represent two separate performance obligations. The accountant properly allocated $1,000,000 of the contract price...
C. On 1st January 2018, Global Drilling Ltd entered into a GHS22million contract for the construction...
C. On 1st January 2018, Global Drilling Ltd entered into a GHS22million contract for the construction of an office complex at Tema. The building was completed at the end of December 2018. During the period, the following payments were made to the contractor: Payment date Amount GHS’m 1 January 2018 2.00 31 March 2018 6.00 30 September 2018 12.00 31 December 2018 2.00 22.00 Global Drilling’s borrowings as at its year end of 31st December 2018 were as follows: ...
ABC Ltd (“ABC”) entered into a contract on 1st January 20x6 to build a factory building...
ABC Ltd (“ABC”) entered into a contract on 1st January 20x6 to build a factory building for its customer on its customer’s land for $20 million. The completion is expected to be in two years’ time. ABC’s policy is to bill its clients based on 60% in the first year and the balance upon completion of the project. ABC has a 31st December financial year end. It has adopted FRS 115 Revenues from Contracts with Customers and adopts the input...
On January 1st 2020, B Ccompany Acquired 12,500 of the 50,000 shares (25%) of the common...
On January 1st 2020, B Ccompany Acquired 12,500 of the 50,000 shares (25%) of the common stock of C company for $30 per share. Per C company's annual report for the year ending 12/31/2020 they reported a net income of $210,000 and declared/paid total cash dividends of $100,000. C Company's stock price had a fair value of $31 per share on December 31, 2020. After considering the impact of the above information, complete the table below assuming significant influence and...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT