You expect to receive a payment of 1 million British pounds after six months. The pound is
Question:
a. Given the current exchange rate, what is the expected payment in dollars?
b. Given the future exchange rate, how much would you receive in dollars?
c. If, after six months, the pound is worth $1.40, what is your loss from the decline in the value of the pound?
d. To avoid this potential loss, you enter a contract for the future delivery of pounds at the futures price of $1.56. What is the cost to you of this protection from the possible decline in the value of the pound?
e. If, after entering the contract, the price of the pound falls to $1.40, what is the maximum amount that you lose? (Why is your answer dif ferent from your answer to part c?)
f. If, after entering the contract, the price of the pound rises to $1.80, how much do you gain from your position?
g. How would your answer to part f be different if you had not made the contract and the price of the pound had risen to $1.80?
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Related Book For
Basic Finance An Introduction to Financial Institutions Investments and Management
ISBN: 978-1111820633
10th edition
Authors: Herbert B. Mayo
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