Forceval Co is a UK-based company which has the following expected
transactions..
One month: Expected receipt of $240,000
One month: Expected payment of $140,000
Three months: Expected receipts of $300,000
The finance manager has collected the following information:
Spot rate ($ per £): 1.7820 ± 0.0002
One month forward rate ($ per £): 1.7829 ± 0.0003
Three months forward rate ($ per £): 1.7846 ± 0.0004
Money market rates for Forceval Co:
Borrowing Deposit
One year sterling interest rate 4.9% 4.6%
One year dollar interest rate 5.4% 5.1%
Required:
(a) Calculate the expected sterling receipts in one month and in three months
using the forward market. [8 marks]
(b) Calculate the expected sterling receipts in three months using a moneymarket
hedge and recommend whether a forward market hedge or a money
market hedge should be used.
[4 marks]
(c) Discuss how sterling currency futures contracts could be used to hedge the
three-month dollar receipt.
[8 marks]