Homework Answers
Solution:
10) The appropriate rate of exchange is spot rate ($1.85 =pound 1) for determining how many pounds british customer owe.since the british customer will pay in its home currency (pound).so value of $ 1,000,000 today is equal to $1.85 /pound
british customer owe : 1.85/1 = 1,000,000/pound
pound = 1,000,000/1.85
= pound 540,540.54
however US firm can appropriately hedge using forward cover against exchange fluctuation as payment will be received in one year.
Therefore, the Right Option is B) S1.85 = £1.00.
11) Rationale: C) Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to pounds at spot, receive £728,155.34. At 4% this has a FV = £757,281.55 by the way.
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