Exam (elaborations)
international finance review quiz
- Course
- Institution
Richmond is a company operating in the company in the USA Harith international company
[Show more]
Seller
Follow
stephenodhiambo
Content preview
INSTITUTE OF ACCOUNTANCY ARUSHAIN COLLABORATION WITH
COVENTRY UNIVERSITY (UK)
Master of Science in Finance and Investment
2016/17
FINANCIAL RISK MANAGEMENT (ARUM23 EFA)
REVIEW QUESTIONS
SET ONE REVIEW QUESTIONS
QUESTION ONE [HEDGING FOREIGN PAYABLES]
1
, Pink Ink Company is a U.K. based exporter. It has invoiced a customer for US$350,000 payable on 1 st
September. The current US$/£ spot is: 1.5190 – 1.5230. It wishes to hedge its FX risk exposure using
traded currency options. The £ September calls with an exercise price of US$1.50 have a premium of
8c. The £ call option contracts are in respect of £25,000. Option premiums are quoted in cents/£
REQUIRED:
a) Set up the option hedge and compute the option premium payable
a) If on 1st September, the US$/£ spot is 1.6470 – 1.6500 advise Pink Ink on whether it should allow its
option to lapse or exercise them
QUESTION TWO
Premier company, a Tanzanian Company, imports goods from UK and is invoiced for £216,500 payable
on the 15th January. The Company wishes to hedge using current options at an exercise price of
TZS1,750. Data is as follows:
Exchange Rates: TZS/£ 1,712 – 1,715
£ Options Contract Size is £12,500 March Contracts
Exercise Price £Calls £Puts
1,650 90.25 40.30
1,700 80.45 90.80
1,750 62.50 95.80
Contract prices are in cents/£.
REQUIRED:
i) Show the hedge position and compute its cost.
ii) Illustrate the action the company will take on the 15 th January if the TZS/£ spot rate at that
time is TZS1, 842 – 1,845.
iii) Calculate the Net Saving that the company makes as a result of its option hedge.
QUESTION THREE (HEDGING FOREIGN RECEIVABLES)
Opportunity Company is a Great Britain based exporter. It has invoiced a customer in the United States
of America for US$ 1,1058,000 payable of 30 th June. The current US$/£ spot is 1.7296 – 1,7330
The company wishes to hedge its foreign exchange risk exposure using traded currency options. The £
June calls with an exercise price of 1.70 have a premium of 9c. the £ call option contracts are in respect
of £25,000. Option premiums are quoted in cents/£.
REQUIRED:
i) Set up the option hedge and calculate the option cost. (Hint: Round up the required number
of calls to the nearest whole number)
ii) If on 1st June, the US$/£ spot is 1.8460 – 1.8550, advise Opportunity Company on whether
it should allow the options to expire or exercise them.
2
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller stephenodhiambo. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.89. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
56326 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now