Mean and volatility of gbp-usd exchange rate growth

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1. Currently, the exchange rate is $1.20/£. Tomorrow the Fed will announce the short-term interest rate in the US. There is a probability of 30% that the Fed will cut the rate, in which case, the USD will depreciate by 3% with respect to GBP. If the Fed keeps the short-term interest rate unchanged, the USD will appreciate by 6% with respect to GBP. Compute the mean and volatility of GBP/USD exchange rate growth.

2. Assume the following:

U.S interest rate = 4% per annum

British interest rate = 5% per annum

90-day forward rate of British pound = $1.50

Spot rate of pound = $1.48

Eastfly Corp., based in the U.S, will receive 100,000 pounds in the next 90 days. Should they use a forward hedge or a money market hedge (borrowing method)? In other words, you should compare the cost of the firm when buying a GBP forward contract (notional amount of 100,000 GBP) versus the cost of a money market hedge.

Reference no: EM133233647

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