A financial institution has assets denominated in British pound sterling of $125 million and sterling liabilities of $100 million. a) What is the FI's net exposure? b) Is the FI exposed to a dollar appreciation or depreciation? c) How can the FI use futures or forward contracts to hedge its FX rate risk? d) What is the number of futures contracts to be utilized to hedge fully the FI's currency risk exposure? e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI's cash position? f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impact on the FI's futures position.

A financial institution has assets denominated in British pound sterling of $125 million and sterling liabilities of $100 million. a) What is the FI's net exposure? b) Is the FI exposed to a dollar appreciation or depreciation? c) How can the FI use futures or forward contracts to hedge its FX rate risk? d) What is the number of futures contracts to be utilized to hedge fully the FI's currency risk exposure? e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI's cash position? f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impact on the FI's futures position.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 24QA

See similar textbooks

Similar questions

A U.S. exporting firm may use foreign exchange futures to hedge its exposure to exchange rate risk. Its position in futures will depend in part on anticipated payments from its customers denominated in foreign currency.a. In general, however, should its position in futures be more or less than the number of contracts necessary to hedge these anticipated cash flows? (Hint: Think about the firm's stream of cash flows extending out over many years.)b. What other considerations might enter into the hedging strategy?
Suppose, on a certain day in February, a speculator observes the following prices in the foreign exchange and currency futures markets: GBP/USD spot: 1.6465 March futures: 1.6425 September futures: 1.6250 December futures: 1.6130 The speculator thinks that the markets are overestimating the weakness of sterling (GBP) against the dollar. How can she act on this view to make a profit? Under what circumstances do her actions lead to a loss?
Which of the following reflects a hedge of net payables on British pounds by a U.S. firm? A. sell a currency call option in British pounds. B. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit. C. sell pounds forward. D. purchase a currency put option in British pounds.
A firm that has a sum of money denominated in a foreign currency that plans to later convert it to dollars could hedge by which of the following methods. Explain why A. a call on the foreign currency B. a long futures or forward on the foreign currency C. a short put on the foreign currency futures D. all of the above E. none of the above
Assume the following information: 180-day U.S. interest rate 8% 180-day British interest rate 9% 180-day forward rate of British pound $1.50 Spot rate of British pound $1.48 Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge.
Assume that interest rate parity holds. In the spot market1 Japanese yen = $0.009144, while in the 90-day forward market 1 Japanese yen = $0.009184. In Japan, 90-day risk-free securities yield 2%. What is the yield on 90-day riskfreesecurities in the United States?
Are there any limitations in the use of currency futures contracts when locking in a specific exchange rate at which company can sell all the pounds it expects to receive in each of the upcoming months?
An FI is planning to hedge its one-year, 100 million Swiss franc (SF)-denominated loan against exchange rate risk. The current spot rate is $0.60/SF. A 1-year SF futures contract is currently trading at $0.58/SF. SF futures are sold in standardized units of SF125,000. Should the FI be worried about the SF appreciating or depreciating? Should it buy or sell futures to hedge against exchange rate risk exposure? How many futures contracts should it buy or sell if a regression of past spot exchange rates on changes in future exchange rates generates an estimated slope of 1.4? Show exactly how the FI is hedged if it repatriates its principal of SF100 million at year-end, the spot exchange rate of SF at year-end is $0.55/SF, and the forward exchange rate is $0.5443/SF.
Explain how a U.S. corporation could hedge net receivables in euros with futures contracts. Explain how a U.S. corporation could hedge net payables in Japanese yen with futures contracts.
How can the company use currency futures contracts to hedge against exchange rate risk?
In one sense, international investing may be viewed as no more than a straight-forward generalisation of portfolio selection in a domestic market on the other hand, international investments pose problems not encountered in domestic markets. (a) In what ways can the challenges and problems of international investing be mitigated or managed? Outline and discuss the approaches in detail. (b)An investment in risk-free British government securities paying 10% annual interest in British pounds is made by an American investor who starts with $ 20 000. The current exchange rate is $2 per pound. At the end of the year the pound depreciates against the dollar. Calculate the investor’s return in both dollar and pound what if the exchange rate is $2.00, and $2.20?
Assume U.S. interest rates are generally above foreign interest rates. What does this suggest about the future strength or weakness of the dollar based on the IFE? Should U.S. investors invest in foreign securities if they believe in the IFE? Should foreign investors invest in U.S. securities if they believe in the IFE?