Calculate the cash flows if the company uses forward contracts to hedge its EUR exposures

English (U.K.)

Writing Style: Harvard

Purchase of goods CHF230,000 to pay in 3 months Purchase of goods CHF300,000 to pay in 6 months Sales of goods CHF500,000 to receive in 6 months Purchase of goods EUR560,000 to pay in 3 months Purchase of goods EUR250,000 to pay in 6 months Sales of goods EUR470,000 to receive in 6 months Given the following market data: Exchange rate quotes from bank: GBP/CHF GBP/EUR Bid – Ask Bid – Ask Spot 1.7725 – 1.7735 Spot 1.1698 – 1.1708 3-m fwd 44/32 discount. 3-m fwd 41/50 premium 6-m fwd 92/80 discount 6-m fwd 98/107 premium Interest rates Borrowing Deposit GBP 5% 3.5 % CHF 3% 2% EUR 6% 4% a. Calculate the cash flows if the company uses forward contracts to hedge its CHF exposures. b. Calculate the cash flows if the company uses forward contracts to hedge its EUR exposures. c. Calculate the cash flows if the company uses money market hedging technique to hedge its CHF exposures. d. Calculate the cash flows if the company uses money market hedging technique to hedge its EUR exposures. e. Summarise the results of the calculations above make recommendations in a way that helps the company’s executives to make a quick hedging decision for each transaction.

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