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 ?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 7, Problem 3SBD
Textbook Problem

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 ?

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