Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S.dollar over the next 30 days. You will have to pay for a shipment of imported goods in 30 days and want to hedge your currency exposure. The annual U.S. risk-free rate is 5.5 percent, and the U.K. risk-free rate is 4.5 percent. Today spot rate is $1.50.
a) Should you long or short a forward contract to hedge currency risk?
b) What is the the price at which you could enter into a 30-day forward contract?
c) Ten days later the spot rate is $1.53 dollars per pound. What is the the value of your forward position?