Reference no: EM133004677

Poppe plc has contracted to pay EUR 2 million in 4 months to its Italian supplier. Assume today is July 2021. These rates are available:

Spot rate: Great British Pounds (GBP) 1 = Bid EUR 1.1400 and Offer EUR1.1480 EUR/GBP futures = GBP 0.86500 per EUR

Poppe's banker provided some estimates in 4 months:
Spot rate: GBP1 = Bid EUR 1.3000 and Offer EUR 1.3080
EUR/GBP futures = GBP 0.76000 per EUR

The specifications for the EUR/GBP futures contract are as follows: Contract Size : EUR 125,000 Minimum fluctuation: 1 tick (0.001 pence per EUR) Tick value : GBP1.25

Required:

Problem a) Explain the futures hedge to be adopted by the British firm. Calculate the number of futures contracts required.

Problem b) Compute the import payment in sterling in 4 months. Assume the banker's estimates came true.

Problem c) Compute the gain/loss in the spot market and comment on the results.

Problem d) Option contracts are available for the EUR/GBP currency pair. Critically discuss the choice of option based on type, strike and expiry date to hedge the firm's currency risk.

Problem e) Assume the Italian exporter has a subsidiary in Britain, and there is an impending short term loan from the headquarter to its subsidiary. Discuss the hedging method the British firm may use to hedge its currency risk