Your firm is an Italian importer of British bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity. The following were computed without rounding.Select the answer closest to yours.

Question

Your firm is an Italian importer of British bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity.  The following were computed without rounding.Select the answer closest to yours.

Quizplus · Accepted Answer

To redenominate the receivable into Euros, we need to use a forward contract to sell £1,000,000 forward 12 months at the current rate of €1.25/£. The forward contract will give us a guaranteed exchange rate of €1.25/£ in 12 months, which is the date when payment is due.

To calculate the Euro amount of the receivable, we multiply the pound amount by the forward exchange rate:

€1,000,000 x €1.25/£ = €1,250,000

Therefore, the Euro amount of the receivable is €1,250,000.

The closest answer is B) €1,244,212.10, which is only slightly lower than our calculated amount due to slight differences in rounding.

Your Firm Is an Italian Importer of British Bicycles