You have account paybles: ₤5 m in one year. InterestUS: 6.10% per annum & InterestUK: 9% per annum Spot exchange rate: $1.50/£ & Forward exchange rate: $1.46/£ (1-year maturity) Call option strike price: $1.46/£ & Put option premium: $0.02/£ How much will you receive in $ if you use the forward contract hedge? You must show all work to earn credit. No credit will be given without supporting work. 5,000,000 GBP x $1.46 = $7,300,000 $7,300,000 x 6.10% x 1 year = $445,300 $7,300,000 + $445,300 = $7.7453 million 2. Draw a graph for the forward contract hedge. (X axis is the spot rate in the future. Y axis is “$ cash paid.”)

You have account paybles: ₤5 m in one year. InterestUS: 6.10% per annum & InterestUK: 9% per annum Spot exchange rate: $1.50/£ & Forward exchange rate: $1.46/£ (1-year maturity) Call option strike price: $1.46/£ & Put option premium: $0.02/£ How much will you receive in $ if you use the forward contract hedge? You must show all work to earn credit. No credit will be given without supporting work. 5,000,000 GBP x $1.46 = $7,300,000 $7,300,000 x 6.10% x 1 year = $445,300 $7,300,000 + $445,300 = $7.7453 million 2. Draw a graph for the forward contract hedge. (X axis is the spot rate in the future. Y axis is “$ cash paid.”)

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 37QA

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