| Country : | Australia |
|---|
Assignment Task:
Task:
SECTION 1 OF THE ASSIGNMENT : CURRENCY DERIVATIVES.
50 MARKS = 15 Grade Points
Part 1: You work for an exporter based in the USA called Football Kit Corporation. On 1 September 2020 Football Kit received an order to send 500,000 Euros of merchandise to a company in France called Un Football pour Tous and be paid a “lump-sum” settlement on 1 December 2020 in Euros. You are worried that when you receive the Euro payment the exchange rate will be unfavourable. You lock into a 3 month forward “sell” with your bank on 1 September 2020 enabling you to sell 500,000 Euros on 1 December 2020 at a rate of 86 Euro cents for 1 USD. The spot rate on 1 September 2020 was 85 Euro cents but your fear was that the rate could be as high as 88 Euro cents on 1 December 2020 due to your observation that interest rates in the USA are rising faster than those in Europe. You predict that trend will continue until at least the end of November 2020 and that there be no change in the relativity of real wages between Europe and the USA and no change in inflation rates in Europe and the USA. On 1 December 2020 you deliver the goods successfully to the French customer and your bank receives 500,000 Euros on the same day. The spot rate on that day turned out to be 85 Euro cents.
Questions:
a. How much in USD will the exporter’s bank credit to the bank account of the exporter on 1 December 2020? (3 marks) $581 395 (= 500 000 Euros / 0.86)
b. How much will be lost/gained versus the 85 Euro cents spot that existed on 1 December 2019? (3.5 marks)
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