FINA3326 Applied Financial Management

Question 1

A British company has sold goods to a US firm at an agreed price of 5,670,000 USD, which it will receive in December. They choose to manage this exposure using CME futures.
-Contract: GBP/USD Futures
-Expiry: December
-Price: 1.6491
-Size: 62,500 GBP
-Initial margin: 110% of maintenance margin
-Settlement: physical delivery
The current spot value of the pound is 1.6524

A)In order to hedge the exposure does the firm need to buy or sell futures contracts? Why?

B)How many futures contracts will they use?

C)What is the total size of the margin that would be required at the beginning to hedge this exposure?


Question 2

A U.S. firm ETT Consulting has net receivables of 250,000 EUR in six-month’s time as compensation for work undertaken.
The current spot rate is EUR/USD 1.2866/1.2911.
Interest rates in Europe are currently 1% for investing and 3% for borrowing. U.S. interest rates are currently 0.5% for investing and 2% for borrowing. All interest rates are quoted in nominal annual terms
ETT wish to implement a money market hedge.

A)In which currency should the firm invest and in which currency should they borrow?

B)How much should be invested by the firm?

C)How much should be borrowed today?

D)What will the future asset be from the investment made?

Including hedging, what is the effective rate of exchange?