1. On July 2, an American firm elected to close out its account at a British bank on August 28. The firm is expected to have 5 million British pounds in the account at the time of closing. It will convert the funds to U.S. dollars and transfer the funds to a U.S. bank. The relevant spot foreign exchange rate is $1.2949. The September British pound futures contract is priced at $1.2930. Determine the outcome of a futures hedge if on August 28 the spot rate is $1.2715 and the futures rate is $1.2725. All prices are in U.S. dollars per British pound. The British pound futures contract covers 100,000 British pounds.

a. Are you long or short the British pound? Will they be exposed to an increase or decrease in the currency exchange rate?

b. What is the portfolio worth at the time of decision?

c. What is the value of the portfolio on August 28?

d. How much is the gain or loss on the currency position (must state if gain or loss and the amount)?

e. On July 2, how many contracts does the bank need? Do you go long or short the British pound futures

contract? How much is one futures contract worth at time of decision?

f. On August 28, does the bank buy or sell the futures contracts? How much is one futures contract

worth?

g. Is there is a gain or loss on the futures contract? If so, how much is the gain or loss on all the contracts

combined?

h. On August 28, what is the net gain or loss on the combined currency position and the futures contracts (must state if gain or loss and the amount)?