2.Suppose ESPN is expecting revenues of 10,000,000 BP next August (one year from now: T = 1) from its United Kingdom Rugby sports productions division. Fearing that exchange rates could decrease when it converts its 10,000,000 BP, ESPN would like to hedge the dollar value of its revenue. Currently, the spot $/ exchange rate is $1.471429/, the US risk-free rate is 5%, and the British risk-free rate is 3%, and the one-year forward rate offered by U.S. and British banks is determined by the IRPT.

a.Explain how ESPN could hedge the dollar value of its revenue using a forward contract.

b.Explain how ESPN could alternatively hedge its revenue of 10,000,000 BP against exchange-rate risk by using the money market. Assume ESPN can borrow BPs at 3% and dollars at 5%.

c.Suppose in August, the BP futures contract with delivery next August (one year forward) is trading on the CME at $1.50/ (contract size = 62,500 BP). Show how ESPN could hedge its revenue against exchange-rate risk by using the contract expiring next August. Assume that at the futures expiration, ESPN will close its futures position at an expiring futures price equal to the spot exchange rate and convert it BP revenue at the spot exchange rate. Evaluate the position by assuming possible spot $/ exchange rate at expiration of $1.45/ and $1.55/.