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)?

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)?

(a)  

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

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

(a)  

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)  

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)?

(a)