Question
Suppose that you are American and you are planning a trip to England. The trip is a year from now, and you have reserved a
Suppose that you are American and you are planning a trip to England. The trip is a year from now, and you have reserved a hotel room in London at a price of ? 50 per day. You do not have to pay for the room in advance. The exchange rate is currently $1.50 to the pound sterling. a. Explain several possible ways that you could completely hedge the exchange rate risk in this situation. b. Suppose that r?=.12 and r$=.08. Because S=$1.50, what must the forward price of the pound be? c. Show that if F is $0.10 higher than in your answer to part b, there would be an arbitrage opportunity.
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