Question
A U.S.-based insurance company owns a 4,800,000 corporate bond and has of 6,200,000 of claims reserves. It has also bought 325,000 and sold 420,000. The
A U.S.-based insurance company owns a 4,800,000 corporate bond and has of 6,200,000 of claims reserves. It has also bought 325,000 and sold 420,000. The current exchange rate is $1.22/.
a. Calculate the banks dollar net exposure to pounds. Note that your answer should be in U.S. dollars.
b. If the dollar-per-pound exchange rate increases by 8%, what is the banks dollar expected gain or loss?
c. What position in a forward contract based on pounds could the insurance company take to hedge its foreign exchange rate risk?
Be sure to explain how this position will hedge the insurance companys risk in your response.
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