Accounting - Foreign Exchange Futures Contract
Hello if anyone could help me know how to calculate the following question i would be most grateful!
Particles Plc is a medium sized manufacturing company selling caravan spares mainly in the USA and Europe. It is now 15th May 2012 and the treasury department of Particles Plc faces a problem.
The treasury department expects to receive a substantial sum of money in the next 6 months, expected to be $9,000,000 in payment for one of its subsidiaries in the USA. There is some concern that the $ will weaken against the £ although this is not the consensus of the whole department. However, they all agree that a currency hedge would be sensible. They are contemplating a hedge using either currency futures or currency options.
The following data is relevant:
Exchange rates
SPOT
1.5106 - 1.5162
1 month forward
0.42 - 0.38c premium
2 month forward
0.65 - 0.60c premium
3 month forward
0.81 - 0.92c premium
6 month forward
0.90 - 1.02c premium
Futures market contract prices:
Sterling £62,500 contracts (tick value $6.25)
June contract 1.5100
September contract 1.5200
December contract 1.5200
Currency options
Sterling £31,250 contracts (cents per £)
Calls Puts
Exercise price Nov Nov
$1.5000/£ 0.80 1.78
A) Assuming the franchise is won, illustrate the results of using future and option currency hedges if the US$/£ spot exchange rate and futures price at the end of November is:
(i) $1.40
(ii) $1.60
Particles Plc is a medium sized manufacturing company selling caravan spares mainly in the USA and Europe. It is now 15th May 2012 and the treasury department of Particles Plc faces a problem.
The treasury department expects to receive a substantial sum of money in the next 6 months, expected to be $9,000,000 in payment for one of its subsidiaries in the USA. There is some concern that the $ will weaken against the £ although this is not the consensus of the whole department. However, they all agree that a currency hedge would be sensible. They are contemplating a hedge using either currency futures or currency options.
The following data is relevant:
Exchange rates
SPOT
1.5106 - 1.5162
1 month forward
0.42 - 0.38c premium
2 month forward
0.65 - 0.60c premium
3 month forward
0.81 - 0.92c premium
6 month forward
0.90 - 1.02c premium
Futures market contract prices:
Sterling £62,500 contracts (tick value $6.25)
June contract 1.5100
September contract 1.5200
December contract 1.5200
Currency options
Sterling £31,250 contracts (cents per £)
Calls Puts
Exercise price Nov Nov
$1.5000/£ 0.80 1.78
A) Assuming the franchise is won, illustrate the results of using future and option currency hedges if the US$/£ spot exchange rate and futures price at the end of November is:
(i) $1.40
(ii) $1.60
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