You expect to incur a cost and make a payment of €35,000 in one year. The current EUR/GBP exchange rate is £0.92 per euro. The current 1-year interest rates are: GBP 4%, EUR 5%. Explain what kind of risk you might be facing in the situation described above. Provide an example of a forward contract that you would use in order to hedge against the relevant exchange rate risk. Analyse the possible outcomes of your strategy if the EUR/GBP exchange rate in one year is (1) £0.89 per euro, and (2) £0.98 per euro.
You expect to incur a cost and make a payment of €35,000 in one year. The current EUR/GBP exchange rate is £0.92 per euro. The current 1-year interest rates are: GBP 4%, EUR 5%. Explain what kind of risk you might be facing in the situation described above. Provide an example of a forward contract that you would use in order to hedge against the relevant exchange rate risk. Analyse the possible outcomes of your strategy if the EUR/GBP exchange rate in one year is (1) £0.89 per euro, and (2) £0.98 per euro.
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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You expect to incur a cost and make a payment of €35,000 in one year. The current
EUR/GBP exchange rate is £0.92 per euro. The current 1-year interest rates are:
GBP 4%, EUR 5%. Explain what kind of risk you might be facing in the situation
described above. Provide an example of a forward contract that you would use in
order to hedge against the relevant exchange rate risk. Analyse the possible
outcomes of your strategy if the EUR/GBP exchange rate in one year is (1) £0.89
per euro, and (2) £0.98 per euro.
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