How to hedge the currency risk via money market conract

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Reference no: EM132792986

Suppose that you are a U.S. based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 30 days. You will be making payment on a shipment of imported goods in 30 days and want to hedge your currency exposure. The U.S. risk-free rate is 1 percent (monthly rate), and the U.K. risk-free rate is 0.8 percent (monthly rate). These rates are expected to remain unchanged over the next month. The current spot rate is $1.50 per pound. The one-month forward rate is $1.51 per pound.

Problem 1: Indicate whether you should us a long or short forward contract to hedge currency risk.

Problem 2: Calculate the expected dollar cost of using forward contract to hedge.

Problem 3: How to hedge the currency risk via money market conract?

Problem 4: What is the future dollar cost of meeting this euro obligation using a money market contract?

Reference no: EM132792986

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