- 7 Marks
FM – L2 – Q88 – Money Market Hedge
Calculate money market hedge for $600,000 USD receipt in 6 months and estimate 6-month forward exchange rate for BritCo Ltd.
Question
BritCo Ltd expects to receive $600,000 in six months’ time from a customer. It intends to convert these dollars into sterling.
The current spot rate for the dollar against sterling (GBP/USD) is 1.8800. The six-month interest rates are 5% per year for sterling and 3.5% per year for the US dollar.
Required
(a) Show how BritCo Ltd can create a money market hedge for its exposure to a fall in the value of the dollar.
(b) Estimate what the exchange rate should be for a six-month forward contract, GBP/USD.
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