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IF assessement question
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Beanstalk_230 Beanstalk_230
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beanstalk_230
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IF assessement question - November 26th, 2008

Hi friends

i have been given a assessment question to complete this semester in IF. Following is the question. Kindly provide me with any possible help so that i could complete this project.

ABC Ltd is a UK subsidiary of a MNC. On the 7th February 2008, it sold $500,000 worth of goods to a customer XYZ Ltd in the US and expects payment from the customer XYZ Ltd in 3 months time. ABC Ltd does not have any US dollar expenses to match the inflow and is currently short of sterling cash. It has been advised that a 3 month loan can be obtained from one of the following sources:

1. Borrow US dollars immediately from the Eurocurrency market for 3 months and immediately covert the proceeds into sterling.
2. Execute a 3 month forward contract on the foreign receipt and immediately borrow the sterling proceeds from the Eurocurrency market.
3. Borrow an equivalent amount of Euros from a German subsidiary of this MNC.

Note:
The Amount of money it can borrow = (the amount of USD it will receive in 3 months) (the interests expenses)
Calculate Cross Rate if needed
Make reasonable assumptions if needed
Refer to the textbook

Exchange Rates are following:
Foreign Exchange Rate Bid Ask
$/ Spot 1.9455 1.9457
Forward 3 months 1.9368 1.9392
/$ Spot 1.4560 1.4562
Forward 3 months 1.3393 1.3359

Annualised Eurocurrency rates:
GBP 5.623
USD 3.375
EURO 6.425 plus 4 basis points

Questions

A) Calculate the net cash flow resulting from each option and determine which option is superior.
B) Interest rate parity states that the forward discount/premium is equal to the interest rate differential between two countries. Provide a theoretical explanation for the results in (A)
C) Calculate the forward premium/discount.
D) On 31 March 2008, XYZ Ltd informs ABC Ltd that the dollar payment will be deferred to 1st May. Discuss the possible financial impact on ABC Ltd based on your financing decision on (A).
E) Discuss the advantages and disadvantages to ABC Ltd of invoicing an export sale in a foreign currency.
F) Illustrate how to use options as hedging tool for ABC Ltd after receiving the payment.
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beanstalk_230
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Aldershot, England
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Location: Aldershot, England
Re: IF assessement question - February 1st, 2010

Kindly suggest the resources which I should go through to complete the above assignment
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Rose Marry
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rosemarry2
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Re: IF assessement question - April 11th, 2016

Quote:
Originally Posted by beanstalk_230 View Post
Hi friends

i have been given a assessment question to complete this semester in IF. Following is the question. Kindly provide me with any possible help so that i could complete this project.

ABC Ltd is a UK subsidiary of a MNC. On the 7th February 2008, it sold $500,000 worth of goods to a customer XYZ Ltd in the US and expects payment from the customer XYZ Ltd in 3 months time. ABC Ltd does not have any US dollar expenses to match the inflow and is currently short of sterling cash. It has been advised that a 3 month loan can be obtained from one of the following sources:

1. Borrow US dollars immediately from the Eurocurrency market for 3 months and immediately covert the proceeds into sterling.
2. Execute a 3 month forward contract on the foreign receipt and immediately borrow the sterling proceeds from the Eurocurrency market.
3. Borrow an equivalent amount of Euros from a German subsidiary of this MNC.

Note:
The Amount of money it can borrow = (the amount of USD it will receive in 3 months) (the interests expenses)
Calculate Cross Rate if needed
Make reasonable assumptions if needed
Refer to the textbook

Exchange Rates are following:
Foreign Exchange Rate Bid Ask
$/ Spot 1.9455 1.9457
Forward 3 months 1.9368 1.9392
/$ Spot 1.4560 1.4562
Forward 3 months 1.3393 1.3359

Annualised Eurocurrency rates:
GBP 5.623
USD 3.375
EURO 6.425 plus 4 basis points

Questions

A) Calculate the net cash flow resulting from each option and determine which option is superior.
B) Interest rate parity states that the forward discount/premium is equal to the interest rate differential between two countries. Provide a theoretical explanation for the results in (A)
C) Calculate the forward premium/discount.
D) On 31 March 2008, XYZ Ltd informs ABC Ltd that the dollar payment will be deferred to 1st May. Discuss the possible financial impact on ABC Ltd based on your financing decision on (A).
E) Discuss the advantages and disadvantages to ABC Ltd of invoicing an export sale in a foreign currency.
F) Illustrate how to use options as hedging tool for ABC Ltd after receiving the payment.
Hey dear,

I am also uploading a document which will give more detailed explanation on Self-Assessment questionnaire.
Attached Files
File Type: pdf Self-Assessment questionnaire.pdf (549.1 KB, 0 views)
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