Pepper Ltd is a UK$-$based private$-$equity firm that has recently grown considerably during

its short life. Pepepr Ltd$.$ has made an agreement to sell its US subsidiary to Macdonald Plc in September $2023.$ The treasury department expects to receive $$6$

million representing the sale of its subsidiaries in the USA by the end of August $2023$

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 $2023.$ 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.

Required:

Using the information below, write a report to the board of Directors explaining the

different alternatives the company has to manage this risk. In particular, you should

discuss the following:

a$.$ Do nothing

b$.$ Forward Rate Agreement

c$.$ Money Market Hedge

d$.$ Futures Contract

e$.$ Options Contract

$$ Spot rate: $$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 $-$ $ $1\mathrm{.}2690$ Calls august $0\mathrm{.}80$ Puts august $1\mathrm{.}75$