1 A US firm has sold $100 million in exports to another firm in the UK....

 

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1 A US firm has sold $100 million in exports to another firm in the UK. The current spot rate is $2.00 = £1 so the UK firm has contractually agreed to pay the US firm £50 million in 30 days. Thus the US firm has an A/R of £50 million. The US firm does not hedge this A/R and thus faces FX risk. A. What is the dollar value received by the US firm if the exchange rate stays at $2.00 £1? B. What will be the dollar value received by the US firm if the dollar depreciates by 2% in 30 days when the UK firm pays up? Does the US firm gain or lose from the depreciation? C. What will be the dollar value received by the US firm if the £ depreciates by 5% in 30 days? Does the US firm gain or lose from the depreciation? D. What is the value of the £s paid by the UK firm if the $ appreciates by 2%? E. Explain why momentum seems to work when forecasting exchange rates. 1 A US firm has sold $100 million in exports to another firm in the UK. The current spot rate is $2.00 = £1 so the UK firm has contractually agreed to pay the US firm £50 million in 30 days. Thus the US firm has an A/R of £50 million. The US firm does not hedge this A/R and thus faces FX risk. A. What is the dollar value received by the US firm if the exchange rate stays at $2.00 £1? B. What will be the dollar value received by the US firm if the dollar depreciates by 2% in 30 days when the UK firm pays up? Does the US firm gain or lose from the depreciation? C. What will be the dollar value received by the US firm if the £ depreciates by 5% in 30 days? Does the US firm gain or lose from the depreciation? D. What is the value of the £s paid by the UK firm if the $ appreciates by 2%? E. Explain why momentum seems to work when forecasting exchange rates.