On October27, 2014, a currency dealer from Bank of America gives the following quotes for the pound:

Spot rate:...................................$1.60/£

6-month forward rate: .............$1.62/£

Please answer the following questions:

1) Is the pound at a forward discount or premium with respect to the dollar? Explain.

2) On the same date, suppose General Motors (GM) has just completed a sales contract with a British client and expects to receive £10 million in six months.

i. If GM does nothing today to cover the risk, do we know how much (in dollars) will GM receive from this international trade deal? Explain.

ii. If GM uses a six-month forward contract to cover this risk, how much will GM receive (in dollars) from this international trade deal? Explain.

Answer rating: 100% (QA)

1 Forward rate is at premium to spot rate because the Dollar is dep... View the full answer