Question 7 (11 Marks)

The following rates are extracted from HSBC:

Spot rate	USD/GBP	1.5000 1.5500
Outright 6-month forward rate	USD/GBP	1.7000 1.8000
Interbank swap rate	USD/GBP	2100 2300

(a) What is the outright forward rate in the interbank market?

Suppose that a U.S. Corporation has to make a GBP 1 million payment in six months.

(b) How can this U.S. company hedge against this payment?

(c) What is HSBCs position after the U.S. company hedge against this payment?

(d) State clearly how should the HSBC cover its position in the interbank market. What is the cost of this hedge to HSBC? (5 marks)

(e) What is HSBCs profit if it covers its position in the outright forward market? Is your answer different from part (d)? If so, why?