Double A Ltd. is an importer of Craft from Switzerland. The company has contracted to purchase 3,000 items at a unit price of 18 Swiss Francs. Three months credit is allowed before payment is due. Current Exchange Rates Spot SF/£ 2.97000 – 2.99000 1 Month Forward 2.50c – 1.50c premium 3 Months Forward 4.50c – 3.50c premium Current Bank Rates Switzerland Deposit 4% Borrowing 8% United Kingdom Deposit 8% Borrowing 12% a) Explain and illustrate three policies that Double A Ltd. might adopt with respect to the foreign exchange exposure of this transaction. Recommend which policy the company should adopt. Calculations should be included where relevant. Assume that interest rates will not change during the next three months. [15 Marks] b) If the Swiss supplier were to offer 2.5% discount on the purchase price for payment within one month evaluate whether you would alter your recommendations in (a) above. [10 Marks]
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