PT Gas Co is a large multinational company in the UK with a number of subsidiary...

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PT Gas Co is a large multinational company in the UK with a number of subsidiary companies around the world. One of the subsidiary is Laxamana Co which is based in US. PT Gas Co is owing to Laxamana Co amounted to US$2.4 million. PT Gas Co want to hedge against the USD strengthening against the £ because if the £ depreciates against the USD, then the PT Gas Co has to spend more £ to buy the USD later at the end of 3 months. Other information available are: 1. Current exchange rate (US$/£1): 2. Currency Options: Exercise price 1.60 1.62 Spot 3-month futures 1.5962 1.6037 Call options (3-month expiry) Put options (3-month expiry) 1.55 2.08 0.98 3.42 3. Contract size £62,500, Exercise price quotation: US$/£1, Premium: cents per £1 4. In 90 days' time the spot is 1.6213 $/€ 5. Assume that the basis is zero at the maturity of the futures contract Required: Advise PT Gas Co the appropriate hedging strategies for the US$ cash flow that is due to pay in three months to Laxamana Co using currency futures and currency options. Show all the relevant calculations. PT Gas Co is a large multinational company in the UK with a number of subsidiary companies around the world. One of the subsidiary is Laxamana Co which is based in US. PT Gas Co is owing to Laxamana Co amounted to US$2.4 million. PT Gas Co want to hedge against the USD strengthening against the £ because if the £ depreciates against the USD, then the PT Gas Co has to spend more £ to buy the USD later at the end of 3 months. Other information available are: 1. Current exchange rate (US$/£1): 2. Currency Options: Exercise price 1.60 1.62 Spot 3-month futures 1.5962 1.6037 Call options (3-month expiry) Put options (3-month expiry) 1.55 2.08 0.98 3.42 3. Contract size £62,500, Exercise price quotation: US$/£1, Premium: cents per £1 4. In 90 days' time the spot is 1.6213 $/€ 5. Assume that the basis is zero at the maturity of the futures contract Required: Advise PT Gas Co the appropriate hedging strategies for the US$ cash flow that is due to pay in three months to Laxamana Co using currency futures and currency options. Show all the relevant calculations.

Answer rating: 100% (QA)

To hedge against the USD strengthening against the GBP PT Gas Co can consider using currency futures ... View the full answer