A multinational corporation headquartered in the UK with operations in the US wishes to repatriate their US earnings, but is worried about the exchange rate. The company enters a forward contract to sell $1,000,000 against the British pound at an exchange rate of £0.7692 per USD in 90 days (3 months).

One month has now elapsed and the company wishes to value the forward position. The current exchange rate, S_t(£/S), is £0.80 per USD. The annually compounded risk-free rate in the US is 2% and the annually compounded risk-free rate in the UK is 1.20%. What is the value of the forward contract?

Answer rating: 100% (QA)

The value of the forward contract is 1000000 Explanation The ... View the full answer