A UK company expects to receive $500,000 in 5 months’ time. Current Exchange rate 1.7456$/£ + 0.0002 3 month exchange rate 1.7725$/£ + 0.0005 9 month exchange rate 1.8035$/£ + 0.0005 Calculate receipts in £ if forward hedge is taken (to the nearest ‘’000’’ round off)?
My question is if its due in 5 months shouldn’t we get an exchange rate for 5 months? How do we solve the problem?
We estimate a 5 month exchange rate by approximating between the 3 months and 9 month rates (by taking the 3 month rate and adding 2/6 of the difference between the 9 onto and 6 month rates)