The no-arbitrage profit interest rate parity forward price

Assignment Help Financial Management

Reference no: EM131952770

Suppose you are a U.S. based company and exports goods from the United Kingdom. In 90 days, you expect to receive payment for a shipment of goods from the UK worth 100,000 British pounds (settlement). The US risk free discrete rate is 2.6% and the UK risk free discrete rate is 4.0%, and the current FX spot rate is $1.23 per pound.

A. You expect the UK pound currency to decrease against the US dollar over next 90 days. Please explain, whether you should buy or short a forward contract on the FX currency to hedge the foreign exchange risk?

B. What is the no-arbitrage profit “Interest Rate Parity” forward price to enter a forward contract expiring in 90 days?

C. After 30 days since the US company entered into a forward contract agreement the FX spot price for USD per pound is now, $1.19 per pound. The US risk free and UK risk free interest rates have stayed the same. What is the value of the US company’s position in the Forward contract at this 30-day mark of the 90-day forward contract?

D. At expiration of the forward contract (at 90 days), assuming forward price agreed was “Interest Rate Parity” price, and the USD per pound currency spot price is $1.23 per pound, what is the value of the US Company’s forward contract position?

Reference no: EM131952770

Questions Cloud

Balloons inc normally pays quarterly dividend : Balloons Inc normally pays a quarterly dividend. what should the stock price be?

Up-front fees on loan commitments are charged : Up-front fees on loan commitments are charged as a certain percentage of

Standby letters of credit are classified : Which of the following will increase a firm's need for additional funds? Standby letters of credit are classified as

Currency to hedge the foreign exchange risk : whether you should buy or short a forward contract on the FX currency to hedge the foreign exchange risk?

The no-arbitrage profit interest rate parity forward price : What is the no-arbitrage profit “Interest Rate Parity” forward price to enter a forward contract expiring in 90 days?

Estimate your company weighted-average-cost-of-capital : You are about to start to consider batch of new capital budgeting projects. You need to estimate your company’s Weighted-Average-Cost-of-Capital.

Seldom have risk-increasing attributes : Off-balance-sheet activities generally have risk-reducing attributes, but seldom have risk-increasing attributes.

Explain should you go long or short on forward contract : To hedge against a possible decline in price during next 2 months, please explain should you go Long or Short on a Forward contract?

Practices ensure relevance and prevent extinction : Non-profits must behave differently than they have in the past because best practices ensure relevance and prevent extinction

User Account

All Pages