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Question 3d

TGA Co, a multinational company, has annual credit sales of $5·4 million and related cost 
of sales are $2·16 million. Approximately half of all credit sales are exports to a European country, which are invoiced in euros. Financial information relating to TGA Co is as follows:

TGA Co plans to change working capital policy in order to improve its profitability. This 
policy change will not affect the current levels of credit sales, cost of sales or net working capital. As a result of the policy change, the following working capital ratio values are expected:

Required:

TGA Co expects to receive €500,000 from export sales at the end of three months. 
A forward rate of €1·687 per $1 has been offered by the company’s bank and the spot rate is €1·675 per $1. TGA Co can borrow short term in the euro at 9% per year.

Calculate the dollar income from a forward market hedge and a money market hedge, and indicate which hedge would be financially preferred by TGA Co.

(4 marks)