Solution-Implement byselling the forward

Implement byselling the forward

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Reference no: EM132719791

A US firm will sell its pharmaceutical products in Britain the next year, but the exact amount of the revenues is uncertain as it will depend on the trade deal between UK and US after Brexit. The risk management team of the company comes up with the following scenarios that could realize in one year:

State Probability Revenues (P*) S

1 1/3 GBP 980,000 USD/GBP 1.40

2 1/3 GBP 1,000,000 USD/GBP 1.50

3 1/3 GBP 1,070,000 USD/GBP 1.60

The CFO of the firm thinks that to hedge the exposure computed above one has to buy a forward contract. You disagree with the CFO and think that one should sell a forward contract. To check whether you are correct do the following:

Detail the hedging strategy that you would implement byselling the forward (i.e. compute the revenues for the company in each state of the world).

Assume 1-year forward rate, F1(USD/GBP) = 1.50

Reference no: EM132719791

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Implement byselling the forward

Reference no: EM132719791

Reference no: EM132719791

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