A US consulting firm sent an invoice of £200,000 to a UK client firm.The spot rate of pound when the invoice was sent was $1.30. The invoice should only be paid by the UK firm six months from now. Forecasted spot rates six months from now are given as below: Forecasted rate Probability $1.25 0.30 $1.27 0.50 $1.30 0.20 The six-month forward rate is $1.25. Required: If the invoice is to be paid six months from now, illustrate by showing your calculations, whether the US firm will be better off by using forward contract to hedge their forex transaction risk in this scenario
A US consulting firm sent an invoice of £200,000 to a UK client firm.The spot rate of pound when the invoice was sent was $1.30. The invoice should only be paid by the UK firm six months from now. Forecasted spot rates six months from now are given as below: Forecasted rate Probability $1.25 0.30 $1.27 0.50 $1.30 0.20 The six-month forward rate is $1.25. Required: If the invoice is to be paid six months from now, illustrate by showing your calculations, whether the US firm will be better off by using forward contract to hedge their forex transaction risk in this scenario
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A US consulting firm sent an invoice of £200,000 to a UK client firm.The spot rate of pound when the invoice was sent was $1.30. The invoice should only be paid by the UK firm six months from now.
Forecasted rate Probability
$1.25 0.30
$1.27 0.50
$1.30 0.20
The six-month forward rate is $1.25.
Required:
If the invoice is to be paid six months from now, illustrate by showing your calculations, whether the US firm will be better off by using forward contract to hedge their forex transaction risk in this scenario.
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