Your firm is a U.K.-based exporter of bicycles.You have sold an order to a Swiss firm for SFr.1,000,000 worth of bicycles.Payment from the Swiss firm (in Swiss francs)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 a U.K.-based exporter of bicycles.You have sold an order to a Swiss firm for SFr.1,000,000 worth of bicycles.Payment from the Swiss firm (in Swiss francs)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 one-year receivable from SFr.1,000,000 to euro, we need to use a money market hedge. Here are the steps:
1. Determine the spot exchange rates: 
- GBP/CHF spot rate = 1.3000
- GBP/EUR spot rate = 1.1500

2. Calculate the forward exchange rates:
- 12-month forward CHF/GBP rate = 1.3180
- 12-month forward EUR/GBP rate = 1.1870

3. Determine the amount of GBP needed to cover SFr.1,000,000:
- SFr.1,000,000 / GBP/CHF spot rate = £769,230.77

4. Borrow GBP for 12 months at UK 12-month LIBOR rate:
- Assume LIBOR = 2.5%
- GBP to be borrowed = £769,230.77
- Interest to be paid = (GBP to be borrowed) x (LIBOR) x (time) = £19,230.77

5. Convert borrowed GBP to euro at the 12-month forward GBP/EUR rate:
- GBP to be converted = £769,230.77 - £19,230.77 = £750,000
- 12-month forward GBP/EUR rate = 1.1870
- Amount of euros received = (GBP to be converted) x (12-month forward GBP/EUR rate) = €890,250

Therefore, the euro-denominated receivable is €890,250 and the amount of GBP needed to cover it is £464,874.41. The closest answer is B (£464,874.41).

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