Reference no: EM132312283

Suppose the spot rate of the pound today is $1.78 and the three-month forward rate is $1.81.

Complete the following sentence to explain how a U.S. importer who has to pay 18,000 pounds in three months can hedge the foreign exchange risk.

The U.S. importer can cover foreign exchange risk by purchasing £18,000 for three-month delivery at $1.81 per pound. In order to do that, the importer has to be willing to pay $0.03 more per pound than today's spot rate to guard against the possibility that the spot rate in three months will be______ ( lower or higher ) than $1.78 per pound. In three months, when her payments are due, the importer will pay _________, and get £18,000 needed for payment, ________ ( irrespective of or depending on ) what the pound's spot rate is at that time.

What occurs if the U.S. importer does not hedge, and the spot rate of the pound in three months is $1.85 per pound?

A.The importer must pay $33,300 for £18,000, which exceeds the cost she would have incurred by hedging.

B.The importer must pay $32,040 for the £18,000, which is less than the cost she would have incurred by hedging.

C.The importer must pay $32,040 for the £18,000, which exceeds the cost she would have incurred by hedging.

D.The importer must pay $33,300 for the £18,000, which is less than the cost she would have incurred by hedging.