Consider the following information for the U.K. and the U.S: U.K. inflation rate (annual) 3.56% U.S. inflation
Question:
Consider the following information for the U.K. and the U.S:
U.K. inflation rate (annual) 3.56%
U.S. inflation rate 1.95%
GBP/USD spot rate 1.3079
6-month GBP Eurodollar deposit rate 0.9131%
6-month USD Eurodollar deposit rate 2.83%
Sept. futures rate on the CBOE 1.3234
Premium for a Sept 1.32 call 0.05
Premium for a Sept 1.32 put 0.06
a. Suppose you will receive 100,000 GBP in 6-months. Should you hedge? Which is the best way (forward, future, money market, or option) to hedge?
b. If you will pay 100,000 in 6-months, should you hedge? Again which is the best hedge? In both scenarios take Brexit into account.
Please give numerical examples and proof.