While you were visiting London, you pre-ordered a brand new Maserati car for 140,000. You have negotiated a deal where you can pay for the car in 12 months from now. You have enough cash invested into money market securities with your bank in New York City (in dollars), which pay 1.2% annual interest. Currently, the spot exchange rate is 1.3620 GBP/USD. In London, the comparable annual money market interest rate is 2.5%.

a) Describe briefly the exchange rate risk in this case. All your current savings are invested in dollars. What exchange rate movement would lead to losses?

b) Compute the forward rate based on the money market interest rates and covered interest rate parity. Does the forward rate imply dollar appreciation of depreciation and why?

c) Describe briefly how forward can be used to hedge against the exchange rate risk?

d) What is the hedged price (in one year from now) of Maserati in dollars according to the forward contract?