Malaika plc, a British company, is planning to make a payment in euros of 150 million at
Question:
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 a 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.
2 Assume that at the end of September, the spot rate turns out to be €1.55/£ and a futures contract is 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.
3 Review the primary differences between hedging with futures and hedging with forwards.
4 Explain what is meant by a currency option. Provide a worked example of a currency options strategy and the reasons for its use. Explain why currency put options are not necessarily a bearish investment.
Accounting Principles
ISBN: 978-1119048503
7th Canadian Edition Volume 1
Authors: Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak