### Pay for shipments of british components

##### Reference no: EM131069932

Problem 1: On July 1, an American auto dealer enters into a contract to purchase 20 British sports cars with payment to be made on November 1. Each car will cost 35,000 pounds. The dealer decides to conduct a long hedge with currency futures based on the following quotes on July 1:

Current exchange rate: \$1.6190/£

December pound futures contract price: \$1.5780/£

One pound futures contract:£62,500

Suppose that, on November 1, the spot rate is \$1.7420/£ and the December pound futures contract price is \$1.7375/£.

Questions:

1. If the dealer closes his position on November 1, will he make a profit or loss? How much is it?

2. How much does the dealer effectively pay for the 20 cars?

Problem 2: Fresno Corporation will need £343,800 in 180 days to pay for shipments of British components to its US-based assembly plant. The firm decides to take a hedge with a call option. Financial market data are as follows:

Spot rate of pounding sterling:\$1.50/£

Premium on a 180-day call option at \$1.6720/£:\$0.02/£

Standard value per contract:£31,250

Questions:

1. How many contracts does Fresno have to purchase?

2. What is the total premium it has to pay?

3. If the spot rate at maturity is \$1.6560/£, should Fresno exercise the option? Why or why not?

4. Suppose the spot rate at maturity is \$1.6900/£ and Fresno exercises its option. What is the total amount that the firm pays for the £343,800? How much would it pay if it did not buy a call option?

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