Lee plc has just made a sale to an Australian customer for A$500 000, the payment to
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Lee plc has just made a sale to an Australian customer for A$500 000, the payment to be made in three months’ time. The current exchange rate is £1 = A$2.6. Nominal interest rates for three months are 2 per cent in Australia and 3 per cent in the UK.
Lee is going to avoid transaction risk by using a forward contract.
(a) What cash will change hands and when?
(b) Is the A$ at a forward discount or at a forward premium to sterling?
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