Consider a U.K. based company that exports goods to the EU. The U.K. company expects to receive payment on a shipment of goods in 60 days. Because the payment will be in euros, the U.K. company wants to hedge against a decline in the value of the euro against the pound over the next 60 days. The U.K. risk-free rate is 3% and the EU risk-free rate is 4%. No change is expected in these rates over the next 60 days. The current spot rate is EURGBP0.9230. To hedge the currency risk, the U.K. company should take a short position in a Euro contract at a forward price of (Assume annual compounding):
Consider a U.K. based company that exports goods to the EU. The U.K. company expects to receive payment on a shipment of goods in 60 days. Because the payment will be in euros, the U.K. company wants to hedge against a decline in the value of the euro against the pound over the next 60 days. The U.K. risk-free rate is 3% and the EU risk-free rate is 4%. No change is expected in these rates over the next 60 days. The current spot rate is EURGBP0.9230. To hedge the currency risk, the U.K. company should take a short position in a Euro contract at a forward price of (Assume annual compounding): A.0.9205.; B.0.9215.; C.0.9244.; D.0.9141.