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Exchange rate is currently $1.85 US per 1 British pound. Interest rate is 3% in the US and 4% in the UK. A bank is long a futures contract on 1,000,000 pounds with F= $1.8 million in one year. Write the expression for the present value of the bank’s long futures position, as a function of current spot exchange rate S   a. Value = 1,000,000 (1.8 - S (1.04/1.03)) / 1.03   b. Value = 1,000,000 (1.8 - S (1.03/1.04)) / 1.03   c. Value = 1,000,000 (S (1.03/1.04) – 1.8) / 1.03   d. Value = 1,000,000 (S (1.04/1.03) – 1.8) / 1.03

Exchange rate is currently $1.85 US per 1 British pound. Interest rate is 3% in the US and 4% in the UK. A bank is long a futures contract on 1,000,000 pounds with F= $1.8 million in one year. Write the expression for the present value of the bank’s long futures position, as a function of current spot exchange rate S   a. Value = 1,000,000 (1.8 - S (1.04/1.03)) / 1.03   b. Value = 1,000,000 (1.8 - S (1.03/1.04)) / 1.03   c. Value = 1,000,000 (S (1.03/1.04) – 1.8) / 1.03   d. Value = 1,000,000 (S (1.04/1.03) – 1.8) / 1.03

Essentials Of Investments
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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Exchange rate is currently $1.85 US per 1 British pound. Interest rate is 3% in the US and 4% in the UK. A bank is long a futures contract on 1,000,000 pounds with F= $1.8 million in one year.

Write the expression for the present value of the bank’s long futures position, as a function of current spot exchange rate S

  a.

Value = 1,000,000 (1.8 - S (1.04/1.03)) / 1.03
  b.

Value = 1,000,000 (1.8 - S (1.03/1.04)) / 1.03
  c.

Value = 1,000,000 (S (1.03/1.04) – 1.8) / 1.03
  d.

Value = 1,000,000 (S (1.04/1.03) – 1.8) / 1.03
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