An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBPO.833/EUR and the 90-day forward rate is GBP0.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBPO.82/EUR. What was the true cost of the forward contract? O a. 11.044% annualised. O b. 17.287% annualised. O c. 7.287% annualised. O d. 14.787% annualised.

An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBPO.833/EUR and the 90-day forward rate is GBP0.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBPO.82/EUR. What was the true cost of the forward contract? O a. 11.044% annualised. O b. 17.287% annualised. O c. 7.287% annualised. O d. 14.787% annualised.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 7QA

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An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBP0.833/EUR and the 90-day forward rate is GBP0.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBP0.82/EUR. What was the true cost of the forward contract? a. 17.287% annualised. b. 14.787% annualised. c. 7.287% annualised. d. 11.044% annualised.
An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBP0.833/EUR and the 90-day forward rate is GBP0.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBP0.82/EUR. What was the true cost of the forward contract? O a. 11.044% annualised. O b. 7.287 % annualised. OC 17.287% annualised. Od 14.787 % annualised.
A US consulting firm sent an invoice of £200,000 to a UK client firm. The spot rate of pound when the invoice was sent was $1.30. The invoice should only be paid by the UK firm six months from now. Forecasted spot rates six months from now are given as below: Forecasted rate Probability $1.25 0.30 $1.27 0.50 $1.30 0.20 The six-month forward rate is $1.25. Required: If the invoice is to be paid six months from now, illustrate by showing your calculations, whether the US firm will be better off by using forward contract to hedge their forex transaction risk in this scenario.
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A US consulting firm sent an invoice of £200,000 to a UK client firm.The spot rate of pound when the invoice was sent was $1.30. The invoice should only be paid by the UK firm six months from now. Forecasted spot rates six months from now are given as below: Forecasted rate Probability $1.25 0.30 $1.27 0.50 $1.30 0.20 The six-month forward rate is $1.25. Required: If the invoice is to be paid six months from now, illustrate by showing your calculations, whether the US firm will be better off by using forward contract to hedge their forex transaction risk in this scenario.
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The US based company is investing in a 2-year project in Europe. The initial investment is €10,000. The expected cash inflow in the year one is €6,000 and in the year two is €8,000. The risk-free rate in US is 3% and Europe 2%. If the spot rate is $1.25/€ and the required rate of return of the project is 14%, calculate the NPV of the project in dollars. (A) The NPV of the project in dollars is $1,773.62. (B) The NPV of the project in dollars is $1,704.32. (C) The NPV of the project in dollars is $1,418.90. (D) The NPV of the project in dollars is $1,989.74.
Suppose that one of the inducements provided by Taiwanto woo Xidex into setting up a local production facility is a10-year, $12.5 million loan at 8% interest. The principalis to be repaid at the end of the tenth year. The marketinterest rate on such a loan is about 15%. With a marginaltax rate of 40%, how much is this loan worth to Xidex?
Assume that Volt Cars Co. (a European company with headquarters in Luxembourg) will receive E154000 in 45 days. Today's spot rate of the British pound is €0.41. The 45-day forward rate is €O.43. Volt Cars Co. has developed the following probability distribution for the spot rate in 45 days: Possible Spot Rate in 45 Days Probability €0.40 17% €0.42 22% €0.44 35% €0.46 26% The probability that the forward hedge will result in a lower Euro-amount received than not hedging is:
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Mr. Sami contacted his FOREX trader and was informed with the following: the spot rate is USD 0.6545/EUR. It is expected that USD may depreciate by 5% after two months. What will be new exchange rate after depreciation? O a. EUR/USD= 0.7872 O b. 1 EUR= 0.6872 USD OC USD/EUR= 0.7582 O d. EUR O.6872/USD