a) A US investment firm receives an invoice of 200,000 from a UK consulting firm. The...

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a) A US investment firm receives an invoice of £200,000 from a UK consulting firm. The spot rate of pound when the invoice was received was $1.50. The invoice should only be paid six months from now. Forecasted spot rates six months from now are given as below: Forecasted rate $1.43 $1.46 $1.52 Probability 0.20 0.70 0.10 The six-month forward rate is $1.47. A call option on pounds that expires in six months has an exercise price of $1.48 and a premium of $0.03. A put option on pounds that expires in six months has an exercise price of $1.49 and a premium of $0.02. Required: If the invoice is to be paid six months from now, illustrate by showing your calculations, whether the firm will be better off by using forward contract to hedge the forex transaction risk. (10 marks) a) A US investment firm receives an invoice of £200,000 from a UK consulting firm. The spot rate of pound when the invoice was received was $1.50. The invoice should only be paid six months from now. Forecasted spot rates six months from now are given as below: Forecasted rate $1.43 $1.46 $1.52 Probability 0.20 0.70 0.10 The six-month forward rate is $1.47. A call option on pounds that expires in six months has an exercise price of $1.48 and a premium of $0.03. A put option on pounds that expires in six months has an exercise price of $1.49 and a premium of $0.02. Required: If the invoice is to be paid six months from now, illustrate by showing your calculations, whether the firm will be better off by using forward contract to hedge the forex transaction risk. (10 marks)

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5010 Calculation of outflows under different hedging alternatives 1 Forward hedging Spot R... View the full answer