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What is the synthetic forward price of uk pound

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Problem 1

A manager of a corporation based in U.S. is expecting to receive 1,000,000 UK pounds in 1 year from corporation's UK client. At that time the manager is planning to exchange UK pounds for US dollars. Current market rates are as follows: U.S. 1-year interest rate is 6% per annum, UK 1-year interest rate is 4.5% per annum, the spot price of UK pound is $1.55, the forward price of UK pound is $1.56. Assume discrete compounding.

(a) What is the synthetic forward price of UK pound?

(b) Given the rates above what should the manager's actions be if the goal is to lock-in future US dollar revenue at the best possible exchange rate? Describe the strategy in detail, show your calculations.

Reference no: EM132842828

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