Pacific Fixed Income Pension Fund is managing its business in another country and needs tob convert its foreign income into US dollars every quarter and pay to its sponsors. This company enters into a forward contract with Barclay to sell a foreign currency for K1 at time T1. The exchange rate at time T1 proves to be S1 (S1 >K1). The company asks Barclay if it can roll the contract forward until timeT2 (T2 >T1) rather than settle at time T1. Barclay agrees to a new delivery price, K2. Suppose that you are the Risk Management Department Manager of Barclay. Explain how you will calculate K2 correctly.

Pacific Fixed Income Pension Fund is managing its business in another country and needs tob convert its foreign income into US dollars every quarter and pay to its sponsors. This company enters into a forward contract with Barclay to sell a foreign currency for K1 at time T1. The exchange rate at time T1 proves to be S1 (S1 >K1). The company asks Barclay if it can roll the contract forward until timeT2 (T2 >T1) rather than settle at time T1. Barclay agrees to a new delivery price, K2. Suppose that you are the Risk Management Department Manager of Barclay. Explain how you will calculate K2 correctly.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 29QA

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