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Does this hedge eliminate your exposure to foreign exchange risk?

18 / 01 / 2019 Research Papers

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9.6 Suppose S 0 $/£ = $1.25/£, F 1 $/£ = $1.2/£, i £ = 11.56%, and i $ = 9.82%. You are to… 1 answer below » 9.6  Suppose S0$/£  = $1.25/£, F1$/£  = $1.2/£, i£  = 11.56%, and i$  = 9.82%. You are to receive £100,000 on a shipment of Madonna albums in one year. You want to fix the amount you must pay in dollars to avoid foreign exchange risk. a.    Form a forward market hedge. Identify which currency you are buying and which currency you are selling forward. When will currency actually change hands— today or in one year? b.    Form a money market hedge that replicates the payoff on the forward contract by using the spot currency and View complete question » 9.6  Suppose S0$/£  = $1.25/£, F1$/£  = $1.2/£, i£  = 11.56%, and i$  = 9.82%. You are to receive £100,000 on a shipment of Madonna albums in one year. You want to fix the amount you must pay in dollars to avoid foreign exchange risk. a.    Form a forward market hedge. Identify which currency you are buying and which currency you are selling forward. When will currency actually change hands— today or in one year? b.    Form a money market hedge that replicates the payoff on the forward contract by using the spot currency and Eurocurrency markets. Identify each contract in the hedge. Does this hedge eliminate your exposure to foreign exchange risk? c.    Are these currency and Eurocurrency markets in equilibrium? How would you arbitrage the difference from the parity condition? (Refer to interest rate parity in Chapter 4.) View less » Nov 16 2015 01:01 PM


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