Boeing imports a Rolls Royce jet engine. It will pay GPB 5 Million, payable in 1 year. The following information is given: RUS = 6.0% (interest rate in the US) RUK = 6.5% (interest rate in the UK) S0= 1.80 USD/GPB (spot exchange rate today) F = 1.75 USD/GBP (the one-year forward rate) T= 1 year Call premium: 0.02 USD/GPB 1

1. Depict the full exposure to exchange rate risk (the unhedged position)

2. Depict the forward hedge and identify the opportunity gains and losses