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Homework answers / question archive / Suppose another U
Suppose another U.S. company knows that it will have to pay five million pounds in three months for goods it has purchased from a British supplier. The U.S. company would like to hedge its exposure to exchange rate risk. Spot 1-month Forward 3-month Forward 6-month Forward Price ($/£) 1.8878 1.8885 1.8897 1.8906 Should the firm buy or sell the forward contract? sell forward contract buy forward contract sell at spot price O buy at Spot price
Ans. Buy forward contract
Since, the forward price of the 3 month contract is 1.8897 is greater than the spot price of 1.8878 thus buying of the forward contract will give a long position on the euro and any increase in the prices of the exchange rate will give us benefit.
