A company located in the UK may need to advance to its US subsidiary an amount of
Question:
A company located in the UK may need to advance to its US subsidiary an amount of $15,000,000 at the end of June. The firm believes that the US dollar will strengthen over the next few months, and a currency hedge would be sensible. It is now 1st March. The following data is relevant.
Exchange rates US$/£
1st March spot 1.4461-1.4492;
4 months forward 1.4290-1.4351.
Futures market contract prices
Sterling £62,500 contracts (Contract price $ per £1):
March contract 1.4430
June contract 1.4312
September contract 1.4300
December contract 1.4281
Required
Calculate the results of using forward and future currency hedges if the US$/£ spot exchange rate at the end of June is 1.4505.
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw