Question - Transaction exposure
Palmer Ltd is a British importer of computer chips. The company has contracted to purchase 4,000 units of chips at a unit price of 20 Swiss Franc from one Swiss company. Three month's credit is allowed to Palmer Ltd before payment is due. Palmer Ltd currently has no surplus cash, but can borrow short term at 2% above bank base rate or invest short term at base rate in either the United Kingdom or Switzerland.
|
Exchange Rates
|
|
|
Swiss franc/£
|
|
Sport
|
2.96-2.98
|
|
1 month forward
|
2.945-2.975
|
|
3 months
|
2.925-2.955
|
|
Current Bank Base Rates
|
|
Switzerland
|
6% per annum
|
|
United Kingdom
|
10% per annum
|
(a) Explain why Palmer Ltd needs to hedge its account payable.
(b) Calculate the costs of hedging using
i. lead payment
ii. forward market hedge
iii. money market hedge
Which is the best alternative.