Business Case

The leader in the firm has been studying foreign exchange market for a number of years and believes that are many ways the firm can benefit. In purchasing $500,000 worth euro at a price hold it for 12 months then sell making a profit as listed below.

Profit would: (500.000/1.3435)* 500.000 +24,749.

Rate = $24,749/$5000, 000 = 5%

In going with the option to purchase, this strategy requires the company to purchase an option that gives the company the right to buy euro 12 months from now at a specific rate. The company gains are measure by the company performance, if however met the difference between the option exercise price and the spot price will be the gain.

Profit= 24,749 less the premium on the option.

In a forward contract to purchase euro for a particular price. The difference of the price and the spot price is the company's gain.

Prof It = 24,749 less the cost of entering into forward contract.

I recommend that the investment should be financed given the company cannot fine more profitable alternatives. In this case, I recommend the organization choose the option strategy. An option is a financial instrument that gives one party the right, but no obligation, to purchase or sell an underlying asset from or to another party at a fixed price over a specific period of time.

The Spot rate = $1.3435/Euro

12-month forward= $1.3705 /Euro in the forward market.

Expected 12 month forward rate = $1.41/Euro

The expected twelve month forward RT is 1.33, meaning the forward euro is undervaluing in comparison with the spot euro. Euro purchase $1.33 dollars after twelve months, it is actually purchased at 1.3705 in the forward market. To make a profit, it would prove wise in selling the Euro for dollars in the spot market from dollars in the forward market. Buying Euros in the forward market, contract to purchase 24,749 Euros at the end of 12 months at a rate of 1.3705/Euro. This locks the price. At the end of 12 months is $1.33/Euro as expected, sell Euro for 24,749 in the market and get (24,749 x 1.33)=$32,916.17.

Amount of profit = $ 32,916.17 -24,749= $8167.17

% return = (8167.17/24,749) x 100 = 33%

He terms and paperwork is necessary to export products and services that are confusing as stated above. A letter of credit is a bank guarantee on behalf of importer to exporter assuring payment when exporter presents documents. Draft-is an unconditional order originated by the drawer to another drawer, directing the drawer to pay a specified amount to the payee. In international trade Draft- this is an order of exporter, mandating the exporter to pay