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Derivative markets to help you to reduce currency risk

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Reference no: EM132299191

Say that there are no derivative markets to help you to reduce currency risk. Assume that only spot markets exist. 

i) Say you are a British importer of American goods and have just made an order which requires payment in US Dollars in 6 months' time. You currently do not have any US Dollars. In terms of foreign exchange rate risk, what would you be most concerned about? How might you use the spot markets to obtain protection against foreign exchange risk? 

ii) What would be the difference IF options were available? 

iii) Consider Joan, who is a British exporter who knows that she will receive a payment of $300,000 in US dollars in 6 months' time with certainty. In terms of foreign exchange rate risk, what would she be most concerned about? How might she use the spot markets to obtain protection against foreign exchange risk? 

Explain in detail. (Hint: her company has an excellent credit rating in the UK and US)

b) True or false? A European option allows the holder to exercise it at any time up to maturity.

c) A treasury bill which matures in 90 days for £250,000 is currently trading at 248 000. What is its rate of discount and its interest yield?

Reference no: EM132299191

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