FIN 403 ASSIGNMENT (CAT 3)

1. ABC Ltd, a USA company has a debt of £10,000,000 from a British company to be
paid in three months. The finance manager has provided the following additional
information:
British pound spot rate: $2.0290
British pound 3-month forward rate: $2.0032
3-month interest rate in the US: 2%
3-month interest rate in the UK: 3%
Advise the company whether to use a forward market hedge or a money market
hedge. (6 marks)
2. An investor has $10,000 to invest; the current spot rate of British pounds is $1.800;
the three month forward rate of the pound is $1.780; the annual interest rate in the US
is 4%; the annual interest rate in the UK is 6%. Demonstrate if there are any profit
opportunities through triangular arbitrage. (4 marks)
3. Discuss the determinants of exchange rate (10 marks)