Reference no: EM133110317
Suppose that ABC Corporation imported a product from XYZ Corporation and was billed £10 million payable in one year. The money market interest rates and foreign exchange rates are given as follows:
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The U.S. one-year interest rate:
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5% per year
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The United Kingdom one-year interest rate:
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8% per year
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The spot exchange rate:
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$1.33/£
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The one-year forward exchange rate:
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$1.32/£
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Assume that ABC hedge a currency forward contract of £20 million for delivery in one year, in exchange for a predetermined amount of U.S. dollars. Suppose that on the maturity date of the forward contract, the spot rate turns out to be $1.30/£.
a. What will ABC pay if it does not enter into the forward contract?
b. What should ABC short or long the forward contract in order to hedge the foreign exchange risk?
c. What will ABC pay if it does enter into the forward contract?
d. What will ABC gain or lose from the forward hedging?
NOK, an MNC in Thailand, purchased a put option on US dollars for ?.12 per unit. The strike price was ?33.25 and the spot rate at the time the pound option was exercised was ?33.75. Assume there are 10,000 units in a US dollar option. What was NOK's net profit or loss on the option?