A company has entered into a cash-settled forward contract to sell 10m pounds at $1.5/pound. If the exchange rate at expiration is $1.75/pound, the company will: A. Make a payment of 2.5m dollars B. Receive a payment of 2.5 million pounds C. Make a payment of 10m pounds

A company has entered into a cash-settled forward contract to sell 10m pounds at $1.5/pound. If the exchange rate at expiration is $1.75/pound, the company will: A. Make a payment of 2.5m dollars B. Receive a payment of 2.5 million pounds C. Make a payment of 10m pounds

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 55QA

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

10. A company has entered into a cash-settled forward contract to sell 10m pounds at $1.5/pound. If the exchange rate at expiration is $1.75/pound, the company will: A. Make a payment of 2.5m dollars

B. Receive a payment of 2.5 million pounds

C. Make a payment of 10m pounds

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