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Evaluate the dollar is selling at a forward premium

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Reference no: EM13871778

It is February 14, and Rupert Taylor has an obligation to pay Anheuser- Busch $5 million on May 13. Rupert's bank quotes ‘‘A$1.6010/$ Bid and A$1.6020/$ Ask'' in the spot market and ‘‘A$1.6025/$ Bid and A$1.6035/$ Ask'' for forward exchange on May 13. Rupert must pay the bank's ask price if he wants to buy dollars from the bank. Evaluate each of the following statements:

a. The dollar is selling at a forward premium, so Rupert is better off buying dollars in the spot market rather than in the forward market.

b. If Rupert expects the dollar to close below the forward ask price of A$1.6035/$, he should hedge his entire $5 million exposure by purchasing dollars forward.

c. If Rupert expects the dollar to close above A$1.6035/$, he should hedge his entire $5 million exposure by purchasing dollars forward.

d. If Rupert expects the dollar to close above the forward ask price of A$1.6035/$, he should buy even more than $5 million in the forward market in the expectation of making a profit on the difference between the actual spot exchange rate in three months and his forward exchange rate from the bank.

e. Within the next month, Rupert anticipates incurring an additional $5 million obligation that also will be payable on May 13. Rupert should not hedge more than his original $5 million exposure even if he expects the dollar to close above the bank's forward asking price of A$1.6035/$.

Reference no: EM13871778

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