ZuoTi.Pro
Question

. Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of do...

. Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year. What is the appropriate rate of exchange to calculate how many pounds the British customer owes, given the market data which you have available to estimate the exchange spot rate which will prevail in one year?

The answer is $1.90 according to expectation hypothesis

Can you explain why that is the answer?

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Forward rate is the expected spot rate at the time of maturity. Hence, as forward rate is 1.90, expected spot rate in 1 year is 1.90.
So, customer will use the exchange rate of 1.90/

0 1
Add a comment
Know the answer?
Add Answer to:
. Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of do...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Q10) Your firm has a British customer that is willing to place a $1 million order,...

    Q10) Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rate is S1.85 1.00 and the one-year forward rate is S1.90-£1.00. The lead time on the order is such that payment is due in one year. What is the fairest exchange rate to use? A) S1.8750- £1.00 B) S1.85 £1.00 C) $1.90-£1.00 D) none of the options Q11) Your firm is a...

  • Grant, Inc., is a well-known U.S. firm that needs to borrow 10 million British pounds to support a new business in the U...

    Grant, Inc., is a well-known U.S. firm that needs to borrow 10 million British pounds to support a new business in the United Kingdom. However, it cannot obtain financing from British banks because it is not yet established within the United Kingdom. It decides to issue dollar-denominated debt (at par value) in the U.S., for which it will pay an annual coupon rate of 10%. It then will convert the dollar proceeds from the debt issue into British pounds at...

  • Use the following information to answer the next three questions. QUESTION 5 As of today, the...

    Use the following information to answer the next three questions. QUESTION 5 As of today, the spot exchange rate is £1.25/$. The U.S. interest rate is 7% and the interest rate in the euro zone is 10%. What is the one-year forward rate (in terms of a direct quote from the US view) that should prevail according to IRP? Round intermediate steps and your final answer to four decimals. Assume the US is the domestic country. Do not use currency...

  • 1. Suppose that a U.S. firm converts dollars into pounds in order to invest in a...

    1. Suppose that a U.S. firm converts dollars into pounds in order to invest in a British enterprise in the U.K. A year later, the return on the investment is 12 percent in terms of pounds. If, during that period, the dollar appreciated against the pound, then the return on the investment in dollar terms would be A. greater than 12 percent. B. also 12 percent. C. less than 12 percent. D. dependent on the inflation rate, not the exchange...

  • Several factors affect the exchange rate of a currency with another currency. Which of the following...

    Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply. When a government limits imports and restricts foreign exchange transactions, its currency's value tends to increase relative to other currencies. An increase in inflation tends to increase the currency's value with respect to other currencies with lower inflation. If a government intends to prevent its currency's value...

  • Your car dealer has a 0% financing promotion. He’s willing to give you an additional $500...

    Your car dealer has a 0% financing promotion. He’s willing to give you an additional $500 discount off the list price if you finance the car over 36 months instead of 48 months. Which key principle in finance does this illustrate? a. Higher risk requires higher return b. Time value of money c. Cash is king d. Leverage increases financial risk Conflicts of interest in financial markets are unethical because They create perception of unfairness and sap investor confidence in...

  • 1. John sold a call option on Euro for $.04 per unit. The strike price was...

    1. John sold a call option on Euro for $.04 per unit. The strike price was $1.30, and the spot rate at the time the option was exercised was $1.32. Assume John bought the Euro from the market if the option was exercised. Also assume that there are 100,000 units in a Euro option. What was John’s net profit on the call option? Baylor Bank believes the New Zealand dollar will appreciate over the next 20 days from $.50 to...

  • Volkswagen's Hedging Strategy 1. Why did Volkswagen suffer a 95% drop in its 4th quarter, 2003 pr...

    Volkswagen's Hedging Strategy 1. Why did Volkswagen suffer a 95% drop in its 4th quarter, 2003 profits? 2. Do you think the Volkswagen’s decision to hedge only 30% of its anticipated U.S. sales was a good? Why or why not? 3. Do you think the Volkswagen’s decision to revert back to hedging 70% of its foreign currency exposure was a good decision? Why or why not? Embraer and the Wild Ride of the Brazilian Real 4. Is a decline in...

  • 1. Which of the following trades implies that ownership has been taken? a. Buying a futures...

    1. Which of the following trades implies that ownership has been taken? a. Buying a futures contract. b. Selling a futures contract. c. Buying a stock. d. Shorting a stock. e. None of the above implies ownership. The following transactions are the only ones made during the first 4 days a futures contract trades. Answer question 2 based on this table. DAY TRANSACTION S O 1 A Long 30, B Short 30 2 A Long 55, C Short 55 3...

  • QUESTION 1 Coca-Cola has been expanding its core Coca-Cola brand at a rapid rate with the...

    QUESTION 1 Coca-Cola has been expanding its core Coca-Cola brand at a rapid rate with the launch of its first energy drink, Coca-Cola Energy last month. Coca-Cola CEO James Quincey shows no signs of slowing this down and is promising more innovation on the Coca-Cola brand to capture different occasions. Quincey said it will launch Coca-Cola Coffee by the end of the year in 25 countries after successful pilots in nine other markets. Which of the below tactics is represented...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT