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  3. gives lowest cash example 12: pq a uk company, has

gives lowest cash Example 12: PQ a UK company, has recently invoiced a US customer...

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gives lowest cash Example 12: PQ a UK company, has recently invoiced a US customer the sum of 5 Million US$, receivable in one year's time. PQ finance director is considering two methods of hedging the exchange risk. Method 1: Borrowing $ 5 million now for one year, converting the amount into sterling, and repaying the loan out of eventual receipts. Method 2: Entering into a 12 month forward exchange contract with the company's bank to sell the $5 million, and meanwhile borrowing an equivalent amount in sterling. The spot rate of exchange is 1 = US$ 1.4455. The 12 months forward rate of exchange is 1=US$ 1.4165. Interest rates for 12 months are: USA 3.5%, UK 5.75%. You are required to calculate the net proceeds in sterling under both methods and advice the management of PQ on the most advantageous method

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