1. Polytot June 04 Mark Fielding-Pritchard mefielding.com1

2. Polytot  Simply work through the options in order  There as a peso/£ rate given so assume we can use it mefielding.com2 US$Pesos Receive(675mx 60%) /98.2= $4,124,236270m 179.745 (156.30x 1.15)= £1,502,128 Therefore we are hedging $4,124,236

3. Polytot- Forward  Therefore we are hedging $4,124,236  A receipt in 4 months  Question give you 3 month rate and 1 year rate, extrapolate  1.5398- 1.5178 = decline of 2.2c over 9 months. Therefore 1 month = 0.24c  4 month rate is 1.5398- 0.0024= 1.5374  4,124,236/1.5374= £2682604 mefielding.com3

4. Polytot Options  Now is 1 July, receive money on 1 November- December  September expies too soon, March is too expensive  We need to take dollars and buy pounds- calls mefielding.com4 1.5250.033515585 1.5500.022515725 1.5750.014015890 1.6000.007516075 4,124,236/1.5250= £2704417 2704417/31250= 86 contracts Therefore on 1 July we buy 86 December Calls with a strike price of $1.5250

5. Polytot Options contd  1 July Premium cost = $0.335 x 31250 x 86= $90031  $90031/ 1.5475 = £58179 (ignore time cost of money)  Assuming spot on 1/11 is 1.5374 we will exercise mefielding.com5 $£ What we receive on exercise of option $(1.525 x 31250 x 86)=4098438 £(31250 x 86)= 2687500 But we received more dollars, balance is exchanged at spot (4,124,236- 4098438)= $25798 (4,124,236- 4098438)/1.5374= £16780 Premium(58179) Total Receipt£2646101

6. Polytot Futures  Hedging a receipt of 4,124,236 in 4 months on 1/11  We need to buy pounds so buy futures  December, September close too early  $4,124,236/ 1.5275= £269991  /62500= 43 futures  Therefore on 1 July we buy 43 Decembers mefielding.com6

7. Polytot Futures  On 1 July basis risk inherent in December future is 1.5510 – 1.5275= 235, expectation that the £ weakens  Assume basis risk declines evenly over time & futures close at month end  Therefore by 1 November 4/6 of basis risk will have dissipated and 78 remains (235 x 2/6)  At 1 November the spot rate is 1.5374, therefore assumed future price is minus 78 = 1.5296 mefielding.com7

8. Polytot Futures- Close Out 1/11 mefielding.com8 £ Exchange dollars at spot$4,124,236/1.5374£2682604 Close future Bought at 1.5275 Sold at 1.5296 Profit 0.0021 $0.0021x 62500x 43= 5644 5644/1.5374= £3671 Total Received£2686275

9. Polytot Hedging Summary mefielding.com9 Total £s ReceivedEffective Hedge Rate Forward£26826041.5374 Option£26461011.5585 Future£26862751.5275

10. Polytot b)  Need agreement from supermarket, contract  What are the risks of strawberries, - Transportation - Quality - Price - Payment terms - Who bears risks, incoterms - Outlook for Grobbian Peso mefielding.com10