Pacific Lutheran University FINANCE FINANCE 538 8 Suppose a U.S. company knows that it will have to pay five…
8 Suppose a U.S. company knows that it will have to pay five million pounds in three months for goods it has purchased from a British supplier. The U.S. company would like to hedge its exposure to exchange rate risk.
Date Spot 1-mth 3-mth 6-mth
Forward Price ($/£) 1.8878 1.8885 1.8897 1.8906
a) Which forward contract should the firm trade? Should the firm buy or sell the forward contract?
b) What’s the gain or loss on the forward contracts (in dollars) on the expiration date? Suppose the pound spot exchange rate in three months is 1.9886 dollars per pound.
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