Question

Consider the following information for the U.K. and the U.S:

U.K. inflation rate (annual) 3.56%

U.S. inflation rate 1.95%

GBP/USD spot rate 1.3079

6-month GBP Eurodollar deposit rate 0.9131%

6-month USD Eurodollar deposit rate 2.83%

Sept. futures rate on the CBOE 1.3234

Premium for a Sept 1.32 call 0.05

Premium for a Sept 1.32 put 0.06

a. What do you expect will be the GBP/USD exchange rate in 6-months?

b. Suppose you will receive 100,000 GBP in 6-months. Should you hedge? Which is the best way (forward, future, money market, or option) to hedge?

c. If you will pay 100,000 in 6-months, should you hedge? Again which is the best hedge? In both scenarios take Brexit into account.

Answer 1