Logan is considering using a forward contract to hedge the anticipated receivables in pounds next month. His local bank quoted him a spot rate of $1.65 and a 1-month forward rate of $1.6435. Before he decides to sell pounds 1 month forward, he wants to be sure that the forward rate is reasonable, given the prevailing spot rate. A 1-month Treasury security in the United States currently offers a yield (not annualized) of 1 percent, while a 1-month Treasury security in the United Kingdom offers a yield of 1.4 percent. Do you believe that the 1-month forward rate is reasonable given the spot rate of $1.65?
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