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# Hedging, Spot, Rate

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Q: Suppose you place an order for &#8356;56,000 worth of British ale, to be delivered in 3 months. The current \$/&#8356; spot rate is \$1.80, and the 3-month forward rate is \$1.85.

a) Discuss whether you would consider hedging the exchange risk, how you would hedge using a forward contract, and your additional costs or savings if, in 3 months when the shipment arrived, the spot rate is \$1.90, and you had hedged. Please Show all intermediate steps and work.

b) Suppose you fail to hedge, but the British ale seller decides to cut you a break and only pass through half of the pound appreciation. Explain how this would work, calculate the pound appreciation (%&#61508; in \$/&#8356; rate), and the ultimate impact on the price you pay for the ale (in dollars.)

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#### Solution Summary

Discuss whether you would consider hedging the exchange risk, how you would hedge using a forward contract, and your additional costs or savings if, in 3 months when the shipment arrived, the spot rate is \$1.90, and you had hedged. Please Show all intermediate steps and work.

\$2.49