6. A. Consider a US company, GateCorp, that exports products to the United Kingdom.

GateCorp has just closed a sale worth £200,000,000. The amount will be received in two months. Because it will be paid in pounds, the US company bears the exchange risk. In order to hedge this risk, GateCorp intends to use a forward contract that is priced at $1.4272 per pound. Indicate how the company would go about constructing the hedge. Explain what happens when the forward contract expires in two months.

B. ABCorp is a US-based company that frequently imports raw materials from Australia.

It has just entered into a contract to purchase A$175,000,000 worth of raw wool, to be paid in one month. ABCorp fears that the Australian dollar will strengthen, thereby raising the US dollar cost. A forward contract is available and is priced at $0.5249 per Australian dollar. Indicate how ABCorp would go about constructing a hedge.

Explain what happens when the forward contract expires in one month.