Introduction to Finance

3. 
Why is hedging similar to buying insurance?
4. 
If your belief about future exchange rates diff er from those quoted 
as forward rates, how can you attempt to profi t from this diff erence 
in expectations?
5. 
Explain the process for using forward contracts when comparing 
home currency investments and overseas investments over a given 
time period.
6. 
The current U.S. one-month interest rate is 5 percent compared 
to 7 percent in Europe. Today’s spot rate between the euro and dol-
lar is $1.18/€, and today’s one-month forward rate is $1.25/€. The 
United States is the home country. You have $1,000 to invest. What 
steps should you take today and one month from today to be able to 
invest overseas and convert funds back to dollars? Compare the rate 
of return you would get investing in the United States to your covered 
investment in Europe.
7. 
The current U.S. one-month forward rate is $1.25/€. You are an 
American speculator with $40,000. You are sure the spot rate will be 
$1.32/€ one month from today. What steps should you take today and 
one month from today to make a profi t buying and selling euros using 
your $40,000 and a forward contract?
8. 
A U.S.-based multinational corporation (MNC) purchased equip-
ment from a British fi rm today and must pay them £1,000,000 one 
month from today. The MNC is certain the spot rate will be $1.10/£ 
one month from today. The current forward rate is $1.05/£. Should 
the MNC wait one month to buy the pounds using a forward contract? 
Explain what steps you would take today and one month from today. 
Why did you choose this course of action? What is the cost of the 
equipment in terms of dollars?
9. 
A U.S.-based multinational corporation (MNC) sold some equip-
ment to a British fi rm today and will receive £1,000,000 from the 
British fi rm one month from today. Today’s spot rate is $1.12/£. The 
MNC is certain the spot rate will be $1.10/£ one month from today. 
The current forward rate is $1.05/£. Should the MNC wait one month 
and sell the £1,000,000 in the spot market (that is, convert the pounds 
to dollars) or enter a forward contract to sell (that is, convert) the 
pounds? Explain what steps you would take today and one month 
from today. Why did you choose this course of action? How many 
dollars did the MNC receive for this piece of equipment?

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