Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an Italian firm for €1,000,000 worth of bicycles.Payment from the Italian firm (in €)is due in twelve months.Your firm wants to hedge the receivable into pounds.Not dollars.Use the following table for exchange rate data.

Country U.S.S equiv. Currency per U.S.$

Tuesday Monday Tuesday Monday

Britain(pound)£62,500 1.6000 1.6100 0.625 0.6211

1 Month Forward 1.6100 1.6300 0.6211 0.6173

3 Months Forward 1.6300 1.6600 0.6173 0.6024

6 Months Forward 1.6600 1.7200 0.6024 0.5814

12 Months Forward 1.7200 1.8000 0.5814 0.5556

Euro €62,500 1.2000 1.2000 0.833333 0.833333

1 Month Forward 1.2100 1.2100 0.82645 0.82645

3 Months Forward 1.2300 1.2300 0.813008 0.813008

6 Months Forward 1.2600 1.2600 0.793651 0.793651

12 Months Forward 1.2900 1.3200 0.775194 0.7575758

Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type.

Question

Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an Italian firm for €1,000,000 worth of bicycles.Payment from the Italian firm (in €)is due in twelve months.Your firm wants to hedge the receivable into pounds.Not dollars.Use the following table for exchange rate data.

Country	U.S.S equiv.		Currency per U.S.$
	Tuesday	Monday	Tuesday	Monday
Britain(pound)£62,500	1.6000	1.6100	0.625	0.6211
1 Month Forward	1.6100	1.6300	0.6211	0.6173
3 Months Forward	1.6300	1.6600	0.6173	0.6024
6 Months Forward	1.6600	1.7200	0.6024	0.5814
12 Months Forward	1.7200	1.8000	0.5814	0.5556
Euro €62,500	1.2000	1.2000	0.833333	0.833333
1 Month Forward	1.2100	1.2100	0.82645	0.82645
3 Months Forward	1.2300	1.2300	0.813008	0.813008
6 Months Forward	1.2600	1.2600	0.793651	0.793651
12 Months Forward	1.2900	1.3200	0.775194	0.7575758

Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type.

Quizplus · Accepted Answer

To hedge the receivable into pounds, we need to sell €1,000,000 forward to lock in the exchange rate. Based on the given exchange rate data, the forward rate for selling euros and buying dollars in 12 months is $1.29 per €1. Therefore, we can sell €1,000,000 forward using 16 contracts at the rate of $1.29, which would yield $1,290,000 in 12 months.

Next, we need to use the dollars received from the forward contract to buy pounds at the forward rate to eliminate the exchange rate risk. The forward rate for buying pounds and selling dollars in 12 months is $1.72 per £1. Therefore, we can buy £750,000 forward using 12 contracts at the rate of $1.72, which would require $1,290,000.

Overall, this strategy would lock in the exchange rate for the receivable in pounds and eliminate any exchange rate risk. Therefore, choice D is the best choice.

Your Firm Is a U