Chapter 18: Foreign Exchange Risk Management (1)

Rates are dollars per pound; interest rates are annual and quoted deposit - borrowing. Round each money amount to the nearest unit before the next step.

(a) P is due to receive $5M in 3 months' time. Spot: $/GBP 1.5384 - 1.5426. Current 3-month interest rates (annual): US prime 5.2% - 5.8%; UK interest rate (LIBOR) 3.6% - 3.9%. Show how P can use the money markets to hedge the risk.

(b) Q is due to pay $8M in 3 months' time. Spot: $/GBP 1.6201 - 1.6283. Current 3-month interest rates (annual): US prime 6.4% - 6.9%; UK interest rate (LIBOR) 9.2% - 9.9%. Show how Q can use the money markets to hedge the risk.