Suppose you need to pay V = 75,000 GBP in a year from now. Spot rate of GBP is 1 You do not have enough USD to purchase 75,000 GBP right now. Depending on t state of economy, the GBP spot rate in a year from nom may be: Favorable state: 1.1; Neutral state: 1.5; Unfavorable state: 1.7
Suppose you need to pay V = 75,000 GBP in a year from now. Spot rate of GBP is 1 You do not have enough USD to purchase 75,000 GBP right now. Depending on t state of economy, the GBP spot rate in a year from nom may be: Favorable state: 1.1; Neutral state: 1.5; Unfavorable state: 1.7
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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Transcribed Image Text:Suppose you need to pay V = 75,000 GBP in a year from now. Spot rate of GBP is 1.5.
You do not have enough USD to purchase 75,000 GBP right now. Depending on the
state of economy, the GBP spot rate in a year from nom may be:
Favorable state: 1.1; Neutral state: 1.5; Unfavorable state: 1.7
Calculate the benefit of hedging with forward contract for each of the three states.
Assume the forward premium = 0.01.
=
Payoff (SpotRate ++1 - F) * V,
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