Question 1
Following a very successful recent trade fair in the USA, Bakeit plc a fast growing Irish
manufacturer of speciality food products has won a major order to supply its products to a US
chain of health stores.
Bakeit plc has today (1st May 2016) signed a contract with the new US customer for a total price
of $25m. The terms of the contract provide for payment to Bakeit plc in two instalments
following delivery of the product as follows:
1st August 2016
1st November 2016
$10m.
$15m.
Bakeit plc’s bank has supplied the following data today (1st May 2016):
Exchange Rates ($/€)
Spot Rate
One Month Forward
Three Months Forward
Six Months Forward
1.132
0.015 premium
0.025 premium
0.052 premium
1.145
0.018 premium
0.029 premium
0.057 premium
Deposit
2%
3%
Borrow
3.5%
4.2%
Annual Interest Rates
Euro
$
Required
1. Calculate the Euro value of the total contract if Bakeit plc decides to use the appropriate
Forward Exchange Contracts.
(6 marks)
2. Calculate the Euro value of the total contract if Bakeit plc decides to use the Money
Market technique for each receipt.
(10 marks)
3. Recommend which technique you would advise Bakeit plc to use and quantify the benefit
of this choice.
(4 marks)
4. The Finance Director of Bakeit plc has asked you to explain Foreign Currency Options
and how they could be used by his company in the future.
(5 marks)
(Total 25 marks)