Assume today is the 21st of February. Using the information below, FT Extract, answer the following questions (parts i and ii). You work for a US company that is due to receive £250 million in June (you are a US exporter).

Assume today is the 21st of February. Using the information below, FT Extract, answer the following questions (parts i and ii). You work for a US company that is due to receive £250 million in June (you are a US exporter). You, as a treasurer of the company, have decided to use currency futures to hedge the currency exposure risk of this transaction.

i. Using the information content is FT Extract above set out the hedge. Assume that you will receive £250 million on the same day as the June futures contracts mature.

The exchange has a total spread of $0.04 on the average quote.

ii. Estimate the cash flows in June if the actual exchange rate and the future price is $1.99/£1 on the day you receive the £250 million and close your futures position.

Expert Solution

i.

we would take short position in pound futures for the June month.

The future Price will be $1.9588-0.04 = $1.9188

ii.

Payoff in future market = ($1.9188-1.99)*250 = -$17.8 million

Gross amount Received in $ as per future spot rate = 250 Million*1.99

= $497.5 Million

Net Amount Received = Gross amount Received-Payoff in future market

= $497.5 Million-$17.8 million

= $479.70 Million

i. The future Price will be $1.9188.

ii. Net Amount Received = $479.70 Million

Umair answered 1 year ago

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