Logan is considering using a forward contract to hedge the anticipated receivables in pounds next month. His local bank quoted him a spot rate of $1.65 and a one-month forward rate of $1.6435 . Before he decides to sell pounds one month forward, Logan wants to be sure that the forward rate is reasonable, given the prevailing spot rate. A one-month Treasury security in the United States currently offers a yield (not annualized) of 1 percent, while a one-month Treasury security in the United Kingdom offers a yield of 1.4 percent. Do you believe that the one-month forward rate is reasonable given the spot rate of $1.65 ?
Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*
*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.