Answer:
a) Expected payment in dollars is $1,600,000
b) $1,560,000
c) Loss is -$250,000
d) Loss would be $40,000
e) If after hedging the price falls to $1.35, the contract amount would still not change.
f) If after hedging the price rises to $1.80, the contract amount would still not change.
g) Loss would be $200,000
Explanation:
You expect to receive a payment of £1,000,000 in British pounds after six months.
The pound is currently worth $1.60, i.e., £1 = $1.60
Six-month future price is $1.56, i.e., £1 = $1.56
a) At £1 = $1.60 current price, expected payment of £1,000,000 in dollars
= £1,000,000 × $1.60 = $1,600,000
b) At £1 = $1.56 future price, expected payment of £1,000,000 in dollars
= £1,000,000 × $1.56 = $1,560,000
c) If after six months, £1 = $1.35, expected payment of £1,000,000 in dollars
= £1,000,000 × $1.35 = $1,350,000
Therefore, loss = $1,350,000 - $1,600,000 = -$250,000
d) Present price at $1.60 delivery = $1,600,000
Future price at $1.56 delivery = $1,560,000
Loss = $1,600,000 - $1,560,000 = $40,000
g) Present price at $1.60 delivery = $1,600,000
Future price at $1.80 = $1,800,000
Loss = $1,800,000 - $1,600,000 = $200,000
