At the moment, you are planning a trip to Patagonia and you plan to go next year. While in Argentina, you plan to join a tour group and go on an eight-day boat tour of the Tierra del Fuego region. You have reserved a berth on this tour through the tour operator in London. The price of the tour is 550 pounds sterling for eight days. You do not have to pay for the tour in advance. The exchange rates are currently $1.30 to the pound sterling and $0.012 to the peso.

(a) Explain ways in which you could hedge the exchange risk in this situation.

(b) Suppose that rUK = 0.02 (2%) and rUS$ = 0.03 (3%). What is the forward price of the pound?

(c) If the forward rate is $0.05 higher than your answer in part b, is there an opportunity for arbitrage?