Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year. What is the fairest exchange rate to use?
A)$1.85 = £1.00
B)$1.8750 = £1.00
C)$1.90 = £1.00
D)none of the above

Question

Quizplus · Accepted Answer

The fairest exchange rate to use is the forward rate of $1.90 = £1.00, as it reflects the expected future exchange rate when the payment is due in one year.

Your Firm Has a British Customer That Is Willing to Place