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Problem 6 Exchange rate is currently $1.85 US per 1 British pound. Interest rate is 4% in...

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Finance

Problem 6

Exchange rate is currently $1.85 US per 1 British pound.Interest rate is 4% in the US and 3% in the UK. A bank is short afutures contract on 1,000,000 pounds with F= $1.9 million in oneyear.

  1. Find the expected future spot exchange rate using the interestrate parity
  1. What risk is the bank facing?
  1. Write the expression for the present value of the bank’s shortfutures position, as a function of current spot exchange rateS
  1. Find the delta of the bank’s position.

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