Assume that Apex Inc., a US based company, sells merchandise to Products PLC, a British customer, and has to denominate the sale in British pounds with payment to be received in 90 days. Apex will receive £500,000 from the importer. In order to hedge the receivable, Apex decides to borrow British pounds for 90 days at 12 percent and deposit the pounds in an interest-bearing account.
a) How much will Apex have to borrow to cover its receivable?
b) If Apex deposits the money in an interest-bearing account yielding 8 percent, what will be the cash received from the sale, assuming no tax effect? The spot rate at the beginning of the transaction is $1.8500 per pound, and the rate 90 days later is $1.8000.