BP is one of the largest international companies in the oil & gas industry. The company has
Question:
BP is one of the largest international companies in the oil & gas industry. The company has transactions denominated in several currencies. Being a British company, the domestic currency used for valuation is the British pound.
In 3 months, BP is due to receive a 41.5m ZAR reimbursement from a major subsidiary in South Africa.
You have the following information:
Table 1: Bank’s spot and forward rates (in points)
Bid | Ask | |
GBPZAR | 19.6971 | 19.7183 |
GBPZAR 3M FWD | 3104.8000 | 3139.0000 |
Table 2: CME Currency Futures
Settlement | Contract Units | |
GBPZAR 3M | 19.8911 | 125,000 |
Table 3: OTC Currency Options
Strike | Call (in £) | Put (in £) | |
GBPZAR | 19.8925 | 0.031 | 0.025 |
The spot exchange rate in 3 months is expected to be either 19.7762 or 20.1556.
- Calculate the outcome of hedging using forwards.
- Calculate the outcome of hedging using futures.
- Calculate the outcome of hedging using options.
- Recommend a strategy to BP under the two scenarios briefly discussing the differences between each strategy.
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain