You work at the Treasury department of Apple, Inc. and oversee Apple’s FX risk management. Suppose Apple has an account receivable of £1,452,890 due on June 7, 2021, 30 days from now. You are concerned with the potential decline in £ value vs. $ and want to hedge the position. The research department has provided following data to assist you with your hedging decision.

Currency Options available from the Philadelphia Stock Exchange
Type	Exercise price	Premium	Maturity date
Call	$1.4200	$0.010 per £	6/7/2021
Put	$1.4200	$0.035 per £	6/7/2021

Annual money market interest rates
Rates	U.S.	UK
Borrowing	5.30%	4.60%
Deposit	2.20%	1.45%

In addition, the following are the actual and expected spot and futures prices for May 7, 2021, and June 7, 2021.

Prices	Actual rates on 5/7/2021	Assume actual rates on 6/7/2021
Spot exchange rate	$1.3910	$1.4064
June 2021 futures price (settlement price)	$1.3980	$1.4108

On May 7, 2021, Apple and Chase entered into a 30-day forward contract (the forward contract matures on June 7, 2021). The agreed forward rate is $1.4100 per £.

Additional information:

One futures contract on £ is for £62,500

One options contract on £ is for £10,000

Given above information, answer the following question.

1. Determine whether a

a.            100% forward hedge;

b.            100% money market hedge;

c.             100% options hedge;

d.            100% futures contract hedge;

e.            55% with forward and 45% with futures contract; or

f.             No hedging

Would be the most appropriate (that is, will result in the largest $ cash inflow). Show all your calculations.

2. As explained in the previous page, on May 7, 2021, Apple and Chase entered a forward contract that matures on June 7, 2021. Did Chase experience an opportunity cost by entering the forward contract with Apple on May 7, 2021? If yes, calculate the actual opportunity cost and show all your calculations. If not, provide an explanation. Simply stating “Yes” or “No” is not enough.

3. Find the spot exchange rate on June 7, 2021 that will leave Apple indifferent between money market hedging and currency option hedging strategy. Show all your calculations.

4. Calculate the net gain or loss from futures hedging. Show all your calculations.

5. Which hedging strategies listed in question (1) above (100% forward, 100% money market, 100% options, 100% futures, or combination of 55% forward and 45% futures) gave Apple 100% coverage? Explain your answer. Simply mentioning strategies is not enough.

Answer rating: 100% (QA)

1 The most appropriate hedging strategy would be a 100 money market hedge This is because the money market hedge will provide the largest cash inflow ... View the full answer