I have a question which is getting a few people flummoxed, including myself!:
"A UK company purchases chemicals from a US distributor and is required to pay for deliveries in US dollars. The company is risk neutral and expects the exchange rate prevailing on the future payment date to be such as to make it indifferent between taking out a forward contract for the payment date, or being exposed to exchange rate variation. If the the payment date forward exchange rate contract rate is $1.50 and the forward rate contract transaction cost is $0.05 per $ to be provided, what is the expected spot rate on the payment day?"
Your thoughts would be appreciated
Best wishes
"A UK company purchases chemicals from a US distributor and is required to pay for deliveries in US dollars. The company is risk neutral and expects the exchange rate prevailing on the future payment date to be such as to make it indifferent between taking out a forward contract for the payment date, or being exposed to exchange rate variation. If the the payment date forward exchange rate contract rate is $1.50 and the forward rate contract transaction cost is $0.05 per $ to be provided, what is the expected spot rate on the payment day?"
Your thoughts would be appreciated
Best wishes
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