3 Jim is considering using a forward contract to hedge the anticipated receivables in pounds next month. His local bank quoted him a spot rate of 1.45 euros and a one-month forward rate of 1.4435 euros. Before Jim decides to sell pounds one month forward, he wants to be sure that the forward rate is reasonable, given the prevailing spot rate. A one-month Treasury security in Ireland currently offers a yield (not annualized) of 1%, while a one-month Treasury security in the United Kingdom offers a yield of 1.4%. Do you believe that the one-month forward rate is reasonable given the spot rate of 1.45 euros?

As the Sports Exports Company from Ireland exports basketballs to the United Kingdom, it receives British pounds. The cheque (denominated in pounds) for last month’s exports just arrived. Jim Logan (owner of the Sports Exports Company) normally deposits the cheque with his local bank and requests that the bank convert the cheque to euros at the prevailing spot rate (assuming that he did not use a forward contract to hedge this payment). Jim’s local bank provides foreign exchange services for many of its business customers who need to buy or sell widely traded currencies.
Today, however, Jim decided to check the quotations of the spot rate at other banks before converting the payment into euros.