Question: A British company needs 1,000,000 pounds for one year. It decides to borrow US dollars and convert the dollars to pounds. The spot rate today

A British company needs 1,000,000 pounds for one year. It decides to borrow US dollars and convert the dollars to pounds. The spot rate today is $1.25/pound, and the spot rate 1 year from today is $1.32/pound. The 1-year US interest rate is 4% and the 1-year UK interest rate is 4%.

a. Doing a forward is the best strategy because the interest rates are the same

b. The “all-in” cost of borrowing in pound is 4%

c. The “all-in” cost of borrowing in pound is negative

d. Doing a forward hedge is not the best strategy because the interest rates are the same

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The detailed answer for the above question is provided below a Doing a forward is the best strategy because the interest rates are the same False Forward contracts are typically used to hedge against ... View full answer

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