1. Lammer Mark Fielding-Pritchard mefielding.com1

2. 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

3. Forward Contract  Payment $1150  Hedge for 5 months  3 month rate 1.9066, 12 month rate 1.8901  Therefore 1.65c over 9 months =.1833c per month or.37c in 2 months  1.9066-0.0037= 1.9029  1150000/1.9029= UKP604340 mefielding.com3

4. Money Market Hedge  Payment $1150  Put on deposit $s  2%x 5/12= 0.833%  1150/1.00833= $1141  Put on deposit $1141  Buy at 1.9156= UKP= $1141/1.9156 = UKP595.64  Assume we borrow pounds 5.5 x 5/12= 2.29  595.64 x 1.0229= UKP609.28 mefielding.com4

5. Futures  Payment $1150  Sell pounds  December  (1150000/1.8986)/62500= 10  On 1 June Sell 10 Decembers mefielding.com5

6. Futures  On 1 November buy back  Base risk on 1 June 1.9156- 1.8986= 0.0170  That will have declined by 5/7, so basis risk = 0.0049  Spot on 1/11 = 1.9029  Therefore futures price = 1.9029 - 0.0049= 1.8980 mefielding.com6 Sold1.8986 Buy1.8980 Gain0.0006 0.06c x 62500 x 10$375 $1,150,000 - 375 at spot 1.90291155750/1.9029= UKP604142

7. Options December Puts 1.88002.96c1.8504 1.90004.34c1.8566 1.92006.55c1.8545 mefielding.com7 ($1150/1.9000)31250= 19 Buy 19 December puts with a strike price of $1.90 Premium price 4.34c x 31250 x 19= $25769 @1.9156= UKP13452

8. Options  On 1 November spot = 1.9029  Therefore we won’t exercise  (1150000/1.9029) + 13452= 617792 mefielding.com8

9. Result UKP Forward604.34 MMH609.28 Future604.14 Option617.79 mefielding.com9

10. Dollar Imports mefielding.com10 Difference from T0 YearExch Rate$4.200.110PV 01.91562192525 11.85982258300657760.90159257 21.805623260491335250.812108422 31.753023958312033060.731148617 41.702024677062751810.659181344 51.652425417373492120.593207083 704724

11. 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