Question

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Assuming a discounting factor of 1 in your calculation, find the amount the forward contract hedging...

Assuming a discounting factor of 1 in your calculation, find the amount the forward contract hedging instrument which is a forward contract to buy GDP500,000, spot rate at inception is €1.50 for £1, the forward rate is €1.70 for £1, spot rate at maturity is €1.65 for £1, the start date is 1 April 2017, and the maturity date is 31 March 2018.

Select one:

a. EUR50,000

b. EUR75,000

c. EUR25,000

d. EUR100,000

Solutions

Expert Solution

Forward contract ex rate €                                              1.70
Spot rate at maturity €                                              1.65
Transaction size £                                       500,000
Value of hedge= 500000*(1.70-1.65)
Value of hedge= €                                          25,000

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