You are concerned about your transaction exposure on a recent purchase from an exporter in Great Britain. The invoice, just received, is for 275,000 pounds sterling payable in 90 days, which will be about mid-June. The current exchange rate is $1.35 per pound sterling, and you fear that the dollar will depreciate against the pound due to the relatively low interest rates currently prevailing in the United States. The following forward rate is $1.38.
a. What is the cost of the invoice in dollars at the current spot rate?
b. If a forward contract is purchased, what will be the cost of the invoice in dollars at the forward rate?
c. Describe the advantages and disadvantages of hedging the transaction with a forward contract.