importer that incurs costs in GBP and bills its customers in USD is concerned about the depreciation of USD against GBP due to GBP payables of…
A U.S. importer that incurs costs in GBP and bills its customers in USD is concerned about the depreciation of USD against GBP due to GBP payables of £10,000,000 in a month. To hedge (protect) the position, the importer decides to use futures markets. Currently GBP contracts (62,500 GBP each) are traded at 1.5290. Spot rate is 1.5310 (i.e., GBP/USD 1.5310). Suppose the importer takes an equal futures position to its cash market position (GBP 10m) at 1.5290. Assume that the futures contract price and spot rates are 1.5995 and 1.6020, respectively, when the hedge is liquidated. What should the unit cost of GBP be for the importer in terms of USD?
