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Old 01-29-2017, 03:37 PM
accua accua is offline
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Join Date: Jan 2017
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Default Please help me with this question on Foreign exchange risk

I need help to answer this question, its from an exam paper.

Today is 1st May 2016. The company has just been awarded its first major cinstruction contract abroad, worth $30m, payment due in three month's time. As the contract is priced in USD, the board of directors are concerned about the potential risk posed by currency fluctuations. The directors have asked you, a treasury expert, to advise them on helping them in hedging the foreign exchange risk arising from the contract.
You have proposed 3 options:
1/ To take on a forward exchange contract. Exchange rate are $: 1
Spot : 1.0640 - 1.0650
3-mts forward: 0.80 - 0.70c discount

2/ To take on a currency future. Euro futures(IMM) contracts are quoted as follows:
Contract settlement date Contract prices $ per
March 1.0690
June 1.0679
September 1.0667
December 1.0610

3/ To do nothing - do not hedge the contract.

Compute the results of each of the three hedging options being considered, assuming that the spot exchange rate has moved in three month's time to 1.071 - 1.074 and the euro futures price has moved to 1.0745
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