Exchange rate is currently $1.85 US per 1 British pound. Interest rate is 4% in the US
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Question:
Exchange rate is currently $1.85 US per 1 British pound. Interest rate is 4% in the US and 3% in the UK. A bank shorts a futures contract to buy 1,000,000 pounds for $1.9 million in one year.
A. Find the expected future spot exchange rate using the interest rate parity
B. What risk is the bank facing?
C. Write the expression for the present value of the bank’s short futures position, as a function of current spot exchange rate S
D. Find the delta of the bank’s position.
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