Hi sir, I was wondering if you could help me, I have calculated many times but still couldn't get the answer.
Liverpool Co is a UK based trading company. It sells around the world, mainly in Asia.
Today, on 1st of March 2020, sold products worth in Hong Kong (HK) $30m on a three months credit.
The company also expecting a receipt of Euro 2m from a Spain company in six months’ time.
On 1st June 2020, Liverpool Co has a liability of HK$50m to a major supplier in Singapore.
Liverpool accounts for all its cash in sterling and uses forward and money market to hedge its currency exposures.
Following financial information is available for Liverpool co:
Spot Exchange rate
Euro per sterling 1.1121 – 1.1128
HK$ per Sterling 10.8616 – 10.8660
Annual Interest rates Annual Inflation rates
UK 2.40% - 2.00% 4%
Euro 2.70% - 2.30% 4.5%
Hong Kong 2.30% - 1.95% 3.8%
Liverpool has no spare cash and any money required need to be borrowed. The owners are considering using futures contract in to hedge against exchange risk.
All workings to nearest sterling.
Q1 Using money market hedging, determine the sterling cash flow for Liverpool in 3 months’ time?
ANSWER : 1,843,411
Q2 Using the 6 months forward rate, what would the net cash inflow for Liverpool in 6 months time?
ANSWER : 1,794,600
Thank You.
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FOREX
5y ago#1Q1. They will be paying a net $20m in three months time. Therefore they will invest $'s 'now' at interest of 1.95 / 4 = 0.4875%.
So the amount they will invest is $20 / (1.004875) = $19.903m
They will convert at 10.8616 and so will then need 19.903/10.8616 = GBP1.8324m
They will borrow the GBP at 2.4 / 4 = 0.6%, and will therefore repay in 3 months time 1.8324 x 1.006 = GBP 1.843,394m (the difference will be just rounding, which is irrelevant in the exam).
Q2. The six month forward rate will be 1.1128 x 1.0225/1.02 = 1.11553
Therefore the receipt in 6 months time will be 2m / 1.11553 = GBP 1,792,870
All of the above is explained in my free lectures on foreign exchange risk management.
(I don't know where you found the question, but you should be using a Revision Kit from one of the ACCA Approved Publishers. They have answers together with the workings :-) )
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