- A A A Uk Company Has Contracted To Buy 750 000 Of Goods From A Us Supplier Payment Is In Dollars In One Year S Time 1 (177.79 KiB) Viewed 70 times
a a) A UK
company has contracted to buy $750,000 of goods from a US supplier. Payment is in dollars, in one year's time. The spot $/£ exchange rate is $1.23/£ and the one-year forward rate is $1.17/£. What is the sterling cost of the goods in one year's time, if the
company fixes the cost? Briefly discuss the necessary relations required to hold for the forward rate to be safely used. b) The
company is also considering using a currency option to limit its foreign exchange risk. The up-front cost of either a call or a put option on $750,000, exercisable in one year and with an exercise price of $1.17/£, is $6,500. Draw and explain a diagram showing the sterling cost of the $750,000 in relation to the spot exchange rate in one year's time. c) It is six months later. The
company has entered into a forward foreign exchange (FX) contract, but the contract to buy the goods has been cancelled, so it will close out the forward FX contract. The new spot exchange rate is $1.19/£ and the six-month forward rate is $1.11/£. Calculate the gain or loss on closing out the forward FX contract.