Hedging futures and options
Not what you're looking for?
A U.S. based MNC expects to receive royalty payments totaling £1.25 million next month. It is interested in protecting these receipts against a drop in the value of the pound.
It can sell 30 day pound futures at a price of $1.6513 per pound or it can buy pound put options with a strike price of $1.6612 at a premium of 2.0 cents per pound.
The spot price of the pound is currently $1.6560. And, if the pound's price in 30 days is $1.6400 then the futures rate is $1.6410.
Calculate the associated dollar gain or loss associated with hedging with futures vs. options.
Please show your calculation steps.
In your opinion, when should MNC aggressively hedge their foreign exchange risk?
Purchase this Solution
Solution Summary
Hedging futures and options are examined.
Solution Preview
Option 1: Hedge with futures
Sell 1.25 million 30-day pound futures today at $1.6513 each, for a total of 1.25 million * $1.6513 = $2,064,125 today. The £1.25 million in royalty payments you receive next month will be canceled by the £1.25 million you pay on the futures, so your only cashflow is $2,064,125 today.
Option 2: Hedge with options
Buy 1.25 million pound put options with strike $1.6612 at $0.02 each, for a total ...
Purchase this Solution
Free BrainMass Quizzes
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Motivation
This tests some key elements of major motivation theories.
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.