Ippo Ltd is a UK$-$based private$-$equity firm that has recently grown considerably during its short life. Ippo Ltd$.$ has made an agreement to sell its US subsidiary to Universal Development Plc in September $2024.$ The treasury department expects to receive $$6$ million representing the sale of its subsidiaries in the USA by the end of August $2024.$

Due to general economic uncertainty in the UK and the USA, there is some concern that the dollar $($$$)$ will weaken against the pound $()$ although this is not the consensus of the whole management team. However, they all agree that a currency hedge would be sensible$.$

It is now $1$st of March $2024.$ The board of directors asks you, the newly appointed financial manager, to write a report discussing the financial implication of both a strengthening and a weakening of the dollar.

Further Information

$$ Spot rate: $$1\mathrm{.}2612-$ $$1\mathrm{.}2645$

$6-$months forward rate: $$1\mathrm{.}2657-$ $$1\mathrm{.}2705$

$$Money market rates $($Annual rates$)$:

Deposit Borrow

GBP $()2\mathrm{.}3\%4\mathrm{.}7\%$

USD $($$$)5\mathrm{.}5\%8\mathrm{.}3\%$

$$The company is able to obtain a six$-$month future quotation of $$1\mathrm{.}2698/1.$

$$The quoted option premiums for US $($$$)$ and GBP $()$ showed as follow:

$$Option prices $($cents per $$,$ payable on purchase of the option, contract size $62,500)$:

Strike Price Calls Puts

$ August August

$1\mathrm{.}26900\mathrm{.}801\mathrm{.}75$

Report format required, i$.$e$.,$ proper headings, to$,$ from, date, subject, terms of reference etc.

Brief introduction summarising the contents, then,

Consider say both a $10\%$ strengthening and a $10\%$ weakening of the dollar and calculate the actual cost for each strategy.

Perhaps a summary table to begin with and supporting calculations in an Appendix

a$)$ DO NOTHING

Explain what will happen if you do nothing

If you do nothing, you will convert the amount at the spot rate, i$.$e$.$ $$1\mathrm{.}2645$

Discuss the risk of dollar $($$$)10\%$ strengthening and $10\%$ weakening if you chose this option

How will this impact your financial position

b$)$B$.$ FORWARD RATE AGREEMENT

Explain what will happen if you use forward rate agreement $$ using the $6-$month forward rate $-$ $$1\mathrm{.}2705$

Will a forward rate agreement eliminate risk?

What will happen if the dollar $($$$)$ weakens by $10\%?$ Will this impact your financial position

Show relevant calculations

c$)$C$.$ MONEY MARKET HEDGE

Explain what will happen if you use money market hedge

Will it reduce forex risk?

How will this impact your financial position $$ Use the following data to support your computations:

Money market rates $($Annual rates$)$:

Deposit Borrow

GBP $()2\mathrm{.}3\%4\mathrm{.}7\%$

USD $($$$)5\mathrm{.}5\%8\mathrm{.}3\%$

Will there be any practical issues using money market hedge?

Show relevant calculations

d$)$FUTURES CONTRACT

Explain what will happen if you use futures contract $($recall The company is able to obtain a six$-$month future quotation of $$1\mathrm{.}2698/1),$ while the spot rate is $$1\mathrm{.}2645/1$

Will it reduce forex risk?

How would you use futures to create a risk hedging strategy?

Show relevant calculations

E$.$ OPTIONS CONTRACT

Explain what will happen if you use options

In the case study you are given the following information:

$$The quoted option premiums for US $($$$)$ and GBP $()$ showed as follow:

$$Option prices $($cents per $$,$ payable on purchase of the option, contract size $62,500)$:

Strike Price $($$$)$ Calls Puts $1\mathrm{.}26900\mathrm{.}801\mathrm{.}75$

Will it reduce forex risk?

How would you use options to create a risk hedging strategy?

Show relevant calculations

Once you have performed and explained the necessary calculations for each of the strategies, provide a suitable conclusion.