Problem 1
An American importer is due to pay GBP 1,000,000 in three months to a British exporter. The following information is available:
Spot exchange rate (USD/GBP) 1.4150
Three month forward rate (USD/GBP) 1.4135
Three month interest rate in US 4.0% per annum
Three month interest rate in UK 4.8% per annum
(i) Calculate the USD value of payables under a forward market hedge.
(ii) Calculate the USD value of the payables under a money market hedge. In doing so, clearly outline the steps required to perform the money market hedge.
(iii) Assuming that uncovered interest parity holds, how much would the importer expect to
pay if the position remains unhedged?
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