Cooper Inc., a U.S. firm, has just invested £500,000 in a note that will come due in 90 days and is yielding 9.5% annualized. The current spot value of the pound is $1.5612, and the 90-day forward rate is $1.5467.
a. What is the hedged dollar value of this note at maturity?
b. What is the annualized dollar yield on the hedged note?
c. Cooper anticipates that the value of the pound in 90 days will be $1.5550. Should it hedge? Why or why not?
d. Suppose that Cooper has a payable of £980,000 coming due in 180 days. Should this affect its decision of whether to hedge its sterling note? How and why?