Question

i)No excel please . A US firm will receive 125 million pounds in 6 months from its overseas operations. The company could buy a 6 month forward contract on 125 million pounds to hedge its foreign exchange risk.T of F

ii)8The peso/Canadian dollar spot rate is C$.12/MP and the peso sells at a 3% forward premium. Find the current forward rate. C$.1212/MP bC$.1164/MP   c C$8.0989/MP    dNone of the above

iii)In general, hedging with derivative contracts involves taking a position in the derivatives market that allows you to offset potential losses you might incur with the underlying asset.T or F iv)An American company is set to receive 50 million Peruvian soles from its overseas operations in 12 months. The company decides to enter into a 12 month forward contract for 50 million soles to mitigate its price risk. The forward rate is $.30/sole. Find the American firm's profit/loss (in terms of dollars) on the forward contract if the spot rate is $.40/sole at expiration. Round intermediate steps to four decimals. my guess is 5 million ?help please .

Answer 1

1) A US firm will receive 125 million pounds in 6 months from its overseas operations. The company could buy a 6 month forward contract on 125 million pounds to hedge its foreign exchange risk is true because hedging with forward contracts give fixed infolow at the end of maturity of contract period.

2) Current forwards rate would be 0 .1212/0.97=0.1249 that means none of the above

3) in general, hedging with derivative contracts involves taking a position in the derivatives market that allows you to offset potential losses you might incur with the underlying asset is true because by using derivative contracts like call or options you have to take position which would result in either gain or losss when there is fluctuation in the underlying asset .

4)  American firm's profit/loss (in terms of dollars) on the forward contract if the spot rate is $.40/sole at expiration is

50 million (0.40-0.30) = gain of $5 million.