A British company needs 1,000,000 pounds for one year. It decides to borrow US dollars and...
A British company needs 1,000,000 pounds for one year. It decides to borrow US dollars and convert the dollars to pounds. The spot rate today is $1.25/pound, and the spot rate 1 year from today is $1.32/pound. The 1-year US interest rate is 4% and the 1-year UK interest rate is 4%.
a. Doing a forward is the best strategy because the interest rates are the same
b. The “all-in” cost of borrowing in pound is 4%
c. The “all-in” cost of borrowing in pound is negative
d. Doing a forward hedge is not the best strategy because the interest rates are the same
Homework Answers
All in cost of borrowing in pound=(1000000*1.25/1.32*1.04)/(1000000)-1=-1.52%
c. The “all-in” cost of borrowing in pound is negative
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