Suppose SemCo Ltd (a UK Company) has payables of US$40 million due in 90 days from now.
Question:
Suppose SemCo Ltd (a UK Company) has payables of US$40 million due in 90 days from now. Over-the-counter put and call options on US dollars, both at an exercise price of 0.72 per US$, are available for a premium of 0.03 and 0.04 per US$ respectively. If SemCo decides to hedge using options, the required premium for the option used will be paid from an overdraft account on which it pays 6% per annum.
i. Calculate the values if the company chooses the options hedge is used
ii. A 90-day forward contract is available at 0.75/$. Determine the exchange rate at which SemCo Ltd would be indifferent between the options and the forward hedge.
b) As a Treasurer of SemCo Ltd you would like to use currency futures contracts to hedge US$40million that you owe to the supplier in June. A futures quote of 0.74/$ for June delivery is available on International Money Market. The contract size is US$125,000.
You decide to take a position in the futures to hedge exposure to the US$. In June the relevant futures contract is trading 0.76/$. Ignoring margin, was it good that you hedged using futures if the spot exchange rate in June is 75/$? How much is the profit or loss on the futures position?
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer