Malaika plc, a British company, is planning to make a payment in euros of €150 million at the end of September. However, the nearest maturity date for a euro futures contract is at 13 December and it is now 29 January. The face value of one euro futures contract is €250,000.
The spot rate today is €1.49/£ and the futures rate is €1.45/£.
1 Estimate the number of futures contracts required. (25 marks)
2 Assume that at the end of September, the spot rate turns out to be €1.55/£ and a futures contract taken out at the end of September to expire on 13 December is quoted at €1.50/£.
Estimate the total gain or loss earned by Malaika plc. (25 marks)
3 Review the primary differences between hedging with futures and hedging with forwards.
(25 marks)
4 Explain what is meant by a currency option. Provide a worked example of a currency option strategy and the reasons for its use. Explain why currency put options are not necessarily a bearish investment. (25 marks)