Exchange rate risk

A UK company will purchase new machinery in three months' time for $7.5m. The forward

exchange rate is $2.0383 – $2.0390 = £1.

What is the appropriate three-month forward rate at which the company should hedge this

transaction (to four decimal places)?

• 2.0383 $/£

• 2.0835 $/£

The current spot exchange rate between sterling and the euro is €1.4415 = £1. The sterling

annual interest rate is 5.75% pa and the euro annual interest rate is 4.75% pa.

What should the three month €/£ forward rate be (to four decimal places)?

The difference between the price of a futures contract and the spot price on a given date is known as ……………..​ ​ (a)  

• basis
• initial margin
• hedge efficiency
• the premium

The following data is available:

Country Y currency Dollar

Country X currency Peso

Country Y interest rate 1% per year

Country X interest rate 3% per year

Country X expected inflation rate 2% per year

Spot exchange rate in Country Y 1.60 peso per $1

What is the current six-month forward exchange rate in Country Y (to two decimal places)?

peso per $1

The expected future spot rate in one year is 1.4505 euro per $1. The predicted inflation rates

for the year ahead are:

Eurozone Dollar

2% per year 3.5% per year

What is the current spot rate (to four decimal places)?

A company that has a $14m loan, with a variable rate of interest, has acquired a forward rate

agreement (FRA) with a financial institution that offered a 4-11, 2.85% – 2.35% spread.

What would be the amount received from the financial institution, under the terms of the

FRA, if the actual rate of interest was 3.75% (to the nearest dollar)?

What will be the Australian dollar receipt, to the nearest thousand dollars, if the

transaction is hedged using the money market? (in AUD)

Which of the following relationships suggests that current long-term interest rates

can be used to predict future short-term interest rates?

• Expectations theory

• Fischer effect

• Interest Rate parity

• Purchasing power parity

What is the 3-month forward exchange rate, to four decimal places? (USD to AUD)

Why is a currency option a particularly suitable device to reduce exposure to

currency movements when tendering for a contract priced in a foreign currency?

• Cheapest means of achieving a hedge

• Least risky means of achieving a hedge

• Least unfavourable effect in the published accounts

• You may not get the contract and therefore the currency