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Sir I have 2 doubts in this question
1) calculating currency option hedge ( page 293 bpp kit)
When calculating premium paid
They have converted at the buy rate of 1.5475 $/£ spot rate
Shouldn’t they use the sell rate of 1.5510 as we are receiving dollars so we would sell it ?Doubt no2
Page 294 answer section
Calculation of transfer price fixed + variable cost
Manila: I noticed they have charged UK tax for profit before tax in Mozilla of 134 ( Mozilla being subsidiary of the UK co will pay its own tax in its respective country) but they have not charged the UK tax for profits made in Bettuna. I don’t see this specified anywhere in the question. Is this an assumption made that there will be uk tax on profits from Mozilla and no uk tax on profits made in Bettuna ?1. The premium is payable and is calculated in $’s. They therefore need to buy dollars in order to pay the premium.
2. Note 6 of the question says that full credit is given by UK tax for tax paid overseas, and this is the normal rule.
UK tax is 30% and tax in Mozilla is 25%, to there is an extra 5% tax payable in the UK.
Tax in Bettuna is 32% and so there is no extra tax payable in the UK.Both of these problems are dealt with in my free lectures (on foreign exchange risk management, and on investment appraisal).
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