NET off payment and receipts for forward rate

Hi Mr John,

In the following question in a) the hedge was required for the receipts in one month of Dollars using the forward exchange

The question was not asking the hedge of the payment.

But in the answer the net was taken by deducting the payment amount from the receipts and using the forward price of 1.7829+.0003 the dividing the net amount (240000-140000)

So do we have always to net off the payment and receipts without being asked in the question .

And secondly if we want to use the forward rate separately for the payment then we will use 1.7829-.0003

SO how is that operating ,

Thanks,

318 

NEDWEN  Nedwen  Co is a UK?based company that has the following expected transactions.   One month:  

One month:   Expected receipt of $240,000  Expected payment of $140,000  Three months:  Expected receipts of $300,000  The finance manager has collected the following information:  Spot rate ($ per £):       1.7820 ± 0.0002  One?month forward rate ($ per £):  1.7829 ± 0.0003  Three months forward rate ($ per £):  1.7846 ± 0.0004  Money market rates for Nedwen Co:    One year sterling interest rate:  One year dollar interest rate:  Assume that it is now 1 April.   Required:  Borrowing  Depos
One year sterling interest rate:  One year dollar interest rate:  Assume that it is now 1 April.   Required:  Borrowing  Deposit  4.9%  4.6%  5.4%  5.1% 

(a)  Discuss  the  differences  between  transaction  risk,  translation  risk  and  economic  risk. ?  (6 marks) 

(b)  Calculate the expected sterling receipts in one month and in three months using the  forward market. ?  (3 marks) 

(c)  Calculate the expected sterling receipts in three months using a money market hedge  and recommend whether a forward market hedge or a money market hedge should  be used. ?  (5 marks) 

The Answer

Forward market evaluation  Net receipt in 1 month = $240,000 – $140,000 = $100,000  Nedwen Co needs to sell dollars at an exchange rate of 1.7829 + 0.003 = $1.7832 per £  Sterling value of net receipt = $100,000/1.7832 = £56,079  Receipt in 3 months = $300,000  Nedwen Co needs to sell dollars at an exchange rate of 1.7846 + 0.004 = $1.7850 per £  Sterling value of receipt in 3 months = $300,000/1.7850 = £168,067