Share
Explore BrainMass

Exchange rate for the British Pound

In December 2007, the spot exchange rate for the British Pound was $1.9988/£. Suppose that, at the same time, the one-year interest rate in the United States was 3.25% and the one-year interest rate in Great Britain was 4.25%.

a. Based on these rates, what forward (one year) exchange rate is consistent with no arbitrage?

In December 2007, the spot exchange rate for the British Pound was $1.9988/£ and the one-year forward rate was as computed above. Suppose that, at the same time, Global Industries entered into a contract to purchase goods with a price of £425,000 to be delivered in one year and entered into a one-year forward contract to purchase £425,000.

b. What is the amount of the payment in U.S. dollars that Global Industries will have to make in one year to pay for their goods?

Suppose that no feasible forward contract was available and Global had to take a long position in British Pound futures for £425,000 to be delivered in one year at a price of $2.00/£. If the Pound is trading for $1.9549 one year from now:

c. How much will Global have made or lost on its futures position?

d. How much more or less will Global have to pay for its goods than it would have paid at the December 2007 spot exchange rate?

Solution Preview

In December 2007, the spot exchange rate for the British Pound was $1.9988/£. Suppose that, at the same time, the one-year interest rate in the United States was 3.25% and the one-year interest rate in Great Britain was 4.25%.

a. Based on these rates, what forward (one year) exchange rate is consistent with no arbitrage?

Forward rate = $1.9988/£ x (1 + ...

Solution Summary

This solution is comprised of a detailed explanation to answer what forward (one year) exchange rate is consistent with no arbitrage.

$2.19