Question
1. Chambers Inc. will pay GBP 500,000 in 270 days. It considers using (1) a forward hedge, (2) a money market hedge, or (3) no
1. Chambers Inc. will pay GBP 500,000 in 270 days. It considers using (1) a forward hedge, (2) a money market hedge, or (3) no hedge. Chambers develops the following information:
* Spot rate of British pound as of today = 1.61 USD/GBP
* The 270-day forward rate of the British pound, Ft,270, is equal to 1.58 USD/GBP
* The interest rates, for a 270-day holding period, are as follows: deposit rate: 3.5% in the U.K., and 1% in the U.S. borrowing rate: 4% in U.K., and 1.5% in the U.S.
* Chambers Inc. forecasted the future spot rate in 180 days as follows:
Possible Outcomes | Probability |
1.56 USD/GBP | 25% |
1.58 USD/GBP | 35% |
1.60 USD/GBP | 30% |
1.66 USD/GBP | 10% |
Carefully describe each strategy. Which hedging strategy would you recommend to Chambers Inc? Do preferences matter for your strategy recommendation? Justify your answer.
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