Question

In December 20007, the spot exchange rate was $1.9988. Suppose at the same time, the one year interest rate in the United States was 2% and the one year interest rate in Great Britain was 2.5%.


a. Based on these rates, what forward (one year) exchange rate is consistent with the arbitrage?

In December 2007, the spot exchange rate for the British Pound was $1.9988 and the one year forward rate was as computed above. Suppose that, at the same time, Global Industries entered into a contract to purchase goods with a price of 375,000(british pound) to be delivered in one year & entered into a one year forward contract to purchase 375,000(british pound).

b. What is the amount of the payment in US Dollars that Global industries will have to make in one year to pay for their goods?