Problem:
Suppose the spot rate of the pound today is $1.70 and the three-month forward rate is $1.75.
Required:
Question 1: How can a U.S. importer who has to pay 20,000 pounds in three months hedge his or her foreign-exchange risk?
Question 2: What occurs if the U.S. importer does not hedge and the spot rate of the pound in three months is $1.80?
Note: Provide support for your underlying principle.