you are eur based and have the following transactions on your books 600439

You are EUR-based and have the following transactions on your books:

  • A 6-month (182 days) forward purchase of USD 10 million.
  • A 12-month (365 days) forward sale of USD 10 million.
  • A borrowing from a counterparty of USD 10 million at 7% for 12 months (365 days; all the interest paid at maturity).
  • A deposit placed with a counterparty of USD 10 million at 6.5% for 3 months (91 days).

Rates are currently as follows:

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EUR/USD

EUR%

USD%

Spot:

1.2000

3 months:

1.2027

6.5

7.4

6 months:

1.2059

6.5

7.5

12 months:

1.2114

7.0

8.0
  1. Suppose that the spot exchange rate moves to 1.3000 but interest rates are unchanged. What is the effect on the profit and loss account, not considering discounting?

b. What is the effect considering discounting, and what spot EUR/USD deal would provide a hedge against this risk?

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