Pamper plc is an importer/exporter of home furniture. It is based in the UK but trades with other countries around the world. Today is 1 March 2023 and Pamper plc is about to invoice a customer in Germany for 2,100,000 receivable in 6 months' time. Pamper plc is considering 2 following methods of hedging the exchange risk: 

Method 1: A money market hedge. 

Method2: A 6-month forward exchange contract with the company's bank to sell 2,100,000 euros. The financial manager has just received today's market information: Spot rate (1 Euro to GBP): Three-month forward rate (1 Euro to GBP): Annual interest rate for borrowing in EU: Annual interest rate for investing in UK: CME rate for September EUR/GBP: The standard futures contract basis is for 125,000. Required: 

a) Which of the 2 methods is financially advantageous for Continental plc? Show your workings. [10 marks] 

b) Critically evaluate the risks associated with the use of foreign exchange futures to hedge foreign exchange rate risk  

c) Discuss three operational hedging strategies that Pamper plc may use to hedge its foreign exchange rate risk

Answer rating: 100% (QA)

a To determine which method is financially advantageous for Pamper plc we need to compare the costs ... View the full answer