Question Details

Jim is considering using a forward contract to hedge the anticipated receivables in pounds  




1.	Do you think Jim will be able to find a bank that provides him with a more favorable spot rate than his local bank?  Explain.

2.	Do you think that Jim- bank is likely to provide more reasonable quotations for the spot rate of the British pound if it is the only bank in town that provides foreign exchange services?  Explain.

3.	Jim 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 one-month forward rate of $1.6435.  Before Jim decides to sell pounds one month forward, he wants to be sure that the forward rate is reasonable, given the prevailing spot rate.  A one-month Treasury security in the United States currently offers a yield (not annualized) of 1 percent, while a one-month Treasury security in the United Kingdom offers a yield of 1.4 percent.  Do you believe that the one-month forward rate is reasonable given the spot rate of $1.65?




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