question archive Mark receives an order for Euro 25 million worth of machinery from one of his clients in Singapore
Mark receives an order for Euro 25 million worth of machinery from one of his clients in Singapore
Subject:FinancePrice:2.86 Bought9
Mark receives an order for Euro 25 million worth of machinery from one of his clients in Singapore. The specific equipment is manufactured and exported from Germany. Mark has mostly imported machines from China, Korea and Japan, and occasionally from Austria but never Germany. He inquires and identifies a German exporter Gunther -- who is willing to do business with Mark. Gunther can supply the machines in 120 days and expects payment on delivery in Euro. 1) What are the risks Mark faces in entering this deal with Gunther? Give details. 2) How can Mark mitigate the SGD / Euro exchange rate risk? Explain what he should do? Will he make a profit or loss on the exchange conversion? Clearly show your calculations by using the following information: Assume the spot rate S1 today is SGD 1.45 = 1 Euro and the forward rate today for payment 120 days down the road F120 is SGD 1.46 = 1 Euro. There are anticipations that the SGD will depreciate by 2 % against the Euro in the next 120 day.
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1. The risks mark faces in entering the deal are
i. Exchange rate risk SGD vs Euro
ii. Credit risk whether the client will pay him within the agreed deadline.
iii. Risk of meeting the delivery schedule in 120 days for exporting the machine by Mark.
2. To mitigate the SGD/Euro exchange rate risk Mark should enter into a forward contract to buy 25 million Euros at SGD 1.46/Euro
The spot rate after 120 days will be SGD 1.45 + 2% = 1.479
Profit/(Loss) on conversion will be (SGD 1.479 - 1.46) * 25 Mn = SGD 0.475 Mn
