Lammer Mark Fielding-Pritchard mefielding.com1

What are we hedging?  Don’t hedge pounds  Receipt $490, payment $1640, net payment $1150  Write this, marks for matching and not hedging pounds mefielding.com2

Forward Contract  Payment $1150  Hedge for 5 months  3 month rate , 12 month rate  Therefore 1.65c over 9 months =.1833c per month or.37c in 2 months  =  /1.9029= UKP mefielding.com3

Money Market Hedge  Payment $1150  Put on deposit $s  2%x 5/12= 0.833%  1150/ = $1141  Put on deposit $1141  Buy at = UKP= $1141/ = UKP  Assume we borrow pounds 5.5 x 5/12= 2.29  x = UKP mefielding.com4

Futures  Payment $1150  Sell pounds  December  ( /1.8986)/62500= 10  On 1 June Sell 10 Decembers mefielding.com5

Futures  On 1 November buy back  Base risk on 1 June =  That will have declined by 5/7, so basis risk =  Spot on 1/11 =  Therefore futures price = = mefielding.com6 Sold Buy Gain c x x 10$375 $1,150, at spot /1.9029= UKP604142

Options December Puts c c c mefielding.com7 ($1150/1.9000)31250= 19 Buy 19 December puts with a strike price of $1.90 Premium price 4.34c x x 19= UKP13452

Options  On 1 November spot =  Therefore we won’t exercise  ( /1.9029) = mefielding.com8

Result UKP Forward MMH Future Option mefielding.com9

Dollar Imports mefielding.com10 Difference from T0 YearExch Rate$ PV

c) Economic Exposure  Economic exposure risk is the risk that positive NPV projects become negative due to currency fluctuations  Here the dollar is strengthening so costs are increasing  We can match projects so we have projects which generate funds in $s  Swaps offer us the opportunity to fix medium term liabilities  US Export Credit Guarantee Finance may be available if we are importing US goods mefielding.com11