A US firm plans to use a money market hedge to hedge its payment of five million British pounds for British goods in one year. The US interest rate is 5% and the British interest rate is 7%. The spot rate of the British pound is $1.65 and the one-year forward rate is $1.60.
a. How many British pounds does the firm need to invest today?
b. How many US dollars does the firm need to borrow today?
c. How many US dollars will the firm need in one year to pay off the loan?
d. Would the firm have been better or worse off if it had hedged the payables with a forward hedge in this case? Explain.