In this question, you will assume 360 days in a year. A German shipping cargo manufacturer imports steel parts from the UK and is quoted with a GBP 34.846 million bill due to be paid in 210 days from today. The German firm obtains the following money market quote from its dealer:

 

	Bid	Ask
Spot Rate: GBP/EUR	0.90810	0.90859
Forward Rate: GBP/EUR	0.92627	0.92799
EUR Interest Rate (%)	1.73	1.82
GBP Interest Rate (%)	5.06	5.27

 

Futures contracts on the GBP that expire in five business days following payment date of the import currently trade at GBP0.92653/EUR. GBP futures contract sizes are GBP125,000, an initial margin of EUR3,650, and a maintenance margin of EUR2,200. Broker fees are EUR6 per contract for each trade. The German shipping cargo manufacturer funds any up-front hedging costs by borrowing the required amount in their EUR.

 The table below shows the prices of the above futures contract, and the spot rates eventually turn out to be. All values are the closing prices for that day and are the prices at which the German company would execute any trades.

Day	Spot Bid (GBP/EUR)	Spot Ask (GBP/EUR)	Future Price (GBP/EUR)
t=210	1.03702	1.03767	1.03778
t=211	1.04351	1.04417	1.04428
t=212	1.03178	1.03242	1.03217
t=213	1.03724	1.03788	1.03778
t=214	1.04037	1.04102	1.04080
t=215	1.05252	1.05319	1.05285

What is the difference between the cost of the money market hedge and the futures market hedge? The opportunity cost of futures margin requirements can be ignored.

Answer rating: 100% (QA)

SOLUTION To calculate the difference between the cost of the money market hedge and the futures market hedge we need to determine the cost of each hed... View the full answer