Lor Boh GmbH is a medium-sized tea producer company, based in Berlin. It is now 1 December and the following transactions have been contractually agreed:
i. Sale of packaged tea, cash receipt due 1 February of US$197,000
Purchase of production equipment, invoice payable 1 May, for US$447,000
Sale of packaged tea, US$154,000 cash receipt due 1 May.
Money market interest rates are:
Euros 4% per annum
US dollars 5% per annum
Required
a) Demonstrate how you would hedge LorBoh’s foreign exchange risk exposure on the
forward markets.
b) Demonstrate how you would hedge LorBoh’s foreign exchange risk exposure on the money markets.
c) Compare the forward market hedge to that of the money market hedge.
d) Calculate the hedge efficiency that LorBoh could achieve on its foreign exchange risk
