Question

What is the USD cost of a money market hedge on 550,000 GBP payables due in 180 days if the GBP spot rate is $1.44, the 1Y rate is 6.8% in the UK & 5.5% in the U.S.

a. None of these. b. $804,718 c. $771,188 d. $754,228 e. $787,021

Answer 1

We will calculate the forward rate from the given data here.

The spot rate for GBP/USD is given as 1.44.
The 1-year interest rate is 6.8% in the GBP and 5.5% in the USD.

The interest rate for the said period can be calculated using the following formula

(((1+Interest Rate) ^ (1/Compounding Frequency)) - 1) * Duration

The effective interest rate for 180 in USD
((1.055 ^ (1/360)) - 1) * 180 = 0.0271

The effective interest rate for 180 in GBP
((1.068 ^ (1/360)) - 1) * 180 = 0.0334

Forward Rate = Spot Rate * ((1+Interest Rate in Home Currency) / (1+Interest Rate in Foreign Currency))

1.44 * (1.0271 / 1.0334) = 1.4312

550000 * 1.4312 = 787171

Option e is correct

The difference in the values could be because of rounding off.