A US corporation has a UK subsidiary that is expected to generate the earnings of GBP2,000,000 at the end of operating quarter, March 31. The U.S. firm wishes to repatriate the GBP, perhaps to pay domestic shareholders a quarterly dividend. Let current spot rate be USD1.5385 = 1 GBP. The U.S. firm would like to hedge against unexpected depreciation in GBP, since such depreciation will results in fewer USD repatriation. The firm can do so by shorting the GBP forward contract by repatriating in April. Since GBP will be repatriated in April, the US Corporation used April GBP forward contract at USD1.5425 = 1 GBP. On maturity date the spot rate between USD and GBP is USD1.5175 = 1 GBP. Identify the position and determine gain or loss to US Corporation. Gain of USD 50,000 Loss of USD 50,000 Gain of GBP 50,000 Loss of GBP 50,000
A US corporation has a UK subsidiary that is expected to generate the earnings of GBP2,000,000 at the end of operating quarter, March 31. The U.S. firm wishes to repatriate the GBP, perhaps to pay domestic shareholders a quarterly dividend. Let current spot rate be USD1.5385 = 1 GBP. The U.S. firm would like to hedge against unexpected depreciation in GBP, since such depreciation will results in fewer USD repatriation. The firm can do so by shorting the GBP forward contract by repatriating in April. Since GBP will be repatriated in April, the US Corporation used April GBP forward contract at USD1.5425 = 1 GBP. On maturity date the spot rate between USD and GBP is USD1.5175 = 1 GBP. Identify the position and determine gain or loss to US Corporation. Gain of USD 50,000 Loss of USD 50,000 Gain of GBP 50,000 Loss of GBP 50,000
Chapter3: International Financial Markets
Section: Chapter Questions
Problem 2BIC
Related questions
Question
- A US corporation has a UK subsidiary that is expected to generate the earnings of GBP2,000,000 at the end of operating quarter, March 31. The U.S. firm wishes to repatriate the GBP, perhaps to pay domestic shareholders a quarterly dividend. Let current spot rate be USD1.5385 = 1 GBP. The U.S. firm would like to hedge against unexpected depreciation in GBP, since such depreciation will results in fewer USD repatriation. The firm can do so by shorting the GBP forward contract by repatriating in April. Since GBP will be repatriated in April, the US Corporation used April GBP forward contract at USD1.5425 = 1 GBP. On maturity date the spot rate between USD and GBP is USD1.5175 = 1 GBP. Identify the position and determine gain or loss to US Corporation.
- Gain of USD 50,000
- Loss of USD 50,000
- Gain of GBP 50,000
- Loss of GBP 50,000
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you