On the 1st of January, a UK bank enters into a contract to buy a piece of equipment

from the US for $300,000. The invoice is to be settled on the 31st of March.

The exchange rate on the 1st of January is $1.6 = 1.

However, by the 31st of March, the pound may have:

(1) Strengthened to $1.75 = 1 or

(2) Depreciated to $1.45 = 1.

Explain the risk faced by the UK bank.

3. The US$ rate per is quoted as $1.4325 - $1.4330 = 1.

Company A wants to buy $100,000 in exchange for sterling.

Company B wants to sell $100,000 in exchange for sterling.

What rate will the bank offer each company?