inflation in the United States

firms
June 30, 2019
China’s infrastructure
June 30, 2019

You expect that inflation in the United States will be 3%, versus 5% in the United Kingdom. The expected spot rate in one year is $1.8756. The spot rate of the pound as of today is $1.8000. The annual interest rate in the United States is 6% versus an annual interest rate in the United Kingdom of 8%. Call options are available with an exercise price of $1.79, an expiration date of one year from today, and a premium of $.03 per unit. Your firm in the United States expects to need 1 million pounds in one year to pay for imports. Use the money market hedge strategy to deal with the exchange rate risk. Estimate the dollar cash flows you will need as a result of a money market hedge.

 
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