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Help with this question below and an explanation on how 5 months is hedged when the question gives only 3months and 1year forward rates
(a) PYE plc is a UK based company that regularly trades with companies in the USA. Several
large transactions are due in five months’ time. These are shown below. The transactions are in ‘000’ units of the currencies shown.
Assume that it is now 1 June.Exports to: Imports from:
Company 1 $490 £150
Company 2 — $890
Company 3 £110 $750Exchange rates: $US/£
Spot 1•9156 – 1•9210
3 months forward 1•9066 – 1•9120
1 year forward 1•8901 – 1•8945Annual interest rates available to Lammer plc
Borrowing Investing
Sterling up to 6 months 5•5% 4•2%
Dollar up to 6 months 4•0% 2•0%Required:
Calculate the money market hedge and the forwad hedge of Lammer plc on the five-month currency risk
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Hi,
I assume you have a solution to this question.
A question like this is unlikely in F9.
However, having said that you could use IRPT (Interest Rate Parity Theory) to estimate the appropriate 5 month forward rate required to calculate the proceeds under a Forward Contract / Market hedge.
5 month interest rates, required to calculate the proceeds under a Money Market Hedge, are the annual rates given in the Question divided by 12 and multiplied by 5. For example, dollar borrowing rate for 5 months = 4% x 5/12
Regards, Kevin Kelly
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