Investments, tenth edition

  Using Futures to Manage Exchange Rate Risk 

 Consider a U.S. firm that exports most of its product to Great Britain. The firm is vulner-

able to fluctuations in the dollar/pound exchange rate for several reasons. First, the dollar 

value of the pound-denominated revenue derived from its customers will fluctuate with 

the exchange rate. Second, the pound price that the firm can charge its customers in the 

United Kingdom will itself be affected by the exchange rate. For example, if the pound 

 Ample evidence bears out the interest-rate parity relation. For example, on February 3, 

2013, the dollar-denominated LIBOR interest rate with maturity of 6 months was .48% 

while the comparable U.K. pound-denominated rate was higher, at .65%. Therefore, we 

should have expected the forward exchange rate (in $/£) to be lower than the spot rate. 

This is exactly what we observed: While the spot rate was $1.5694/£, the forward rate was 

$1.5681/£. More specifically, interest-rate parity would imply that the forward rate should 

have been 1.5694  3  (1.0048/1.0065) 

1/2

   5  1.5681, just equal to the actual rate.