218 CHAPTER 5. USING FORWARDS FOR INTERNATIONAL FINANCIAL MANAGEMENT
- On June 1, 2000, the flyhas depreciated towaf0.90, but the six-month
interest rates have not changed. In early 2001, theflyis back at par. Compute
the gain or loss (and the cumulative gain or loss) on two consecutive 180-day
forward sales (the first one is signed on Jan. 1, 2000), when you start with a
fly500,000 forward sale. First do the computations without increasing the
size of the forward contract. Then verify how the results are affected if you do
increase the contract size, at the roll-over date, by a factor 1 +rT∗ 1 ,T 2 —that is,
fromfly500,000 tofly512,500. - Repeat the previous exercise, except that after six months the exchange rate
is atwaf/fly1, not 0.9. - Compare the analyses in Exercises 4 and 5 with a rolled-over money-market
hedge. That is, what would have been the result if you had borrowedwaf
for six months (with conversion and investment offly—the money-market
replication of a six-month forward sale), and then rolled-over (that is, renewed)
thewafloan and theflydeposit, principal plus interest?