An american company is commencing work in England and wants to hedge their risk of an adverse currency fluctuation. They submit a bid of (British Pounds) GBP 1.175 million and should recieve a Deposit of 10% GBP (117,500) due when accepted. The US company Planned on receiving GBP 1.0575 million April 14, 1986. To hedge this risk the US company can either sell pounds forward 90 days or secure 90 day pound loan. The loan would borrow pounds and exchange the proceeds into dollars at the spot rate. Then on April 13, would use its pound receipts to repay the loan. The loan would be 1.5% above UK prime rate.The business allowed for a profit margin of 6% (US$98,567). The calculations to obtain this profit margin were done on December 3, 1985
Bid accepted January 14 value of pound USD $1.448
January 14, 1986 Bid accepted:
Spot rate = USD 1.4370
Three month forward rate = USD 1.4198
Prime lending rate (UK) is 13.5%
December 3:
Spot rate = USD 1.482
Pound value at bid = 1,175,000
What is the break even spot rate that gives zero profit as of
A) Bid submission, December 3
B) Bid Acceptance, January 14