Question
Month Change Settle April +0.0038 1.2407 May +0.0039 1.2416 Assume that the spot price on friday: 1.2415. You expect to make a 400,000 payment in
Month | Change | Settle |
April | +0.0038 | 1.2407 |
May | +0.0039 | 1.2416 |
Assume that the spot price on friday: 1.2415.
You expect to make a 400,000 payment in British Pounds on close of business day on Friday. You decide to hedge your risk with futures contracts. Assume you enter into the position at close of day on Wednesday at the futures price of 1.2302. The size of one futures contract on British Pound is 62,500 pounds.
A) What is the total cost in US dollars after you have closed out your positions, and made your payment?
B) What would have been the total cost in US dollars if you had not hedged? Was there any benefit in hedging?
C) What would be the effective price per British Pound?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started