Question
Exchange rate is currently $1.85 US per 1 British pound. Interest rate is 4% in the US and 3% in the UK. A bank is
Exchange rate is currently $1.85 US per 1 British pound. Interest rate is 4% in the US and 3% in the UK. A bank is long a futures contract to buy 1,000,000 pounds for $1.8 million in one year. Which of the following statements is correct?
a. The bank faces no exchange rate risk because the futures price is locked in.
b. The bank has contracted to purchase pound sterling below the expected future exchange rate
c. To hedge the exposure to exchange rate fluctuations, the bank should borrow in the U.S., convert dollars to pounds, and invest in the U.K.
d. The banks position will decline in value if the pound sterling appreciates against the U.S. dollar
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