Question
1.A UK firm has a payment from a European customer arriving in one year in the amount of 4,000,000. The one-year risk-free rate in the
1.A UK firm has a payment from a European customer arriving in one year in the amount of 4,000,000. The one-year risk-free rate in the UK is 3% and in the Eurozone is 2%. The spot rate for the pound is $1.2/ and for the euro is $1.1/. What is the spot cross-exchange rate between the pound and the euro?
If this company wanted to implement a money market hedge for the euro exposure, how would the bank go about it (assuming this company could borrow at the risk-free rate in either country/zone and the bank could access the cross-exchange rate via a broker)?
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