A month ago, your company submitted a bid to repair London Bridge, which your 5-year old daughter and her friends had told you was falling down. Your company deals in dollars, but your bid had to be made in British pounds. You were awarded the contract with a bid of £ 10,175,000. You are due to receive 10% of this value today and the rest in 90 days. You will be paid in pounds. You are concerned though that the $/£ exchange rate may move in a direction that is unfavorable to you during the next 90 days, and you wish to hedge your position as best as is possible. Your banker tells you there two ways that you can hedge-with a forward contract or a money market hedge.
Use some or all of the following information to construct both types of hedges and determine which the best one to use is. Also, tell me the present value of the dollar difference between the two hedges.
At the time you prepared your bid, the spot rate was 1.982 $/£.
Today, the spot rate is 1.937 $/£.
Today's 90-day forward rate is 1.92 $/£.
You can borrow or lend pounds at 10% (annualized)
You can borrow or lend dollars at 5% (annualized)