Hedging, Spot, Rate
Q: Suppose you place an order for ₤56,000 worth of British ale, to be delivered in 3 months. The current $/₤ spot rate is $1.80, and the 3-month forward rate is $1.85.
a) Discuss whether you would consider hedging the exchange risk, how you would hedge using a forward contract, and your additional costs or savings if, in 3 months when the shipment arrived, the spot rate is $1.90, and you had hedged. Please Show all intermediate steps and work.
b) Suppose you fail to hedge, but the British ale seller decides to cut you a break and only pass through half of the pound appreciation. Explain how this would work, calculate the pound appreciation (% in $/₤ rate), and the ultimate impact on the price you pay for the ale (in dollars.)