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Mega Company has just signed a contract to export a machine to Bestway Enterprises, an American corporation. The machine, which cost $500,000, will be delivered in one month and paid for in three months. In recent months the $/£ exchange rate has been volatile and the management is concerned that the volatility may have a negative impact on the future cash flow of the company.
Required
a) Explain how forward contracts and currency futures could be used by Mega Company.
b) Assume today's date is .......(Insert your last birthday before December 2010). Obtain market data for today (your birthday) from the following web links. (NB: These data must be included as an appendix). Construct appropriate hedges with forward contracts and currency futures.
c) Critically appraise the use of forward contracts and currency futures to hedge the exchange rate risk.
d) From the same links above, obtain market data for... ( your date plus three months ) and evaluate the hedges constructed in part b above.
e) If it was forecast that the inflation rate in the UK relative to the US was expected to fall would this affect the company's decision to hedge?
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