1. (50) Todays date: December 1, 2020

You work at the Treasury department of GE and oversee GEs FX risk management. Suppose GE has an account receivable of 7,254,300 Australian dollar (AD) due on December 21, 2020, 20 days from now. You are concerned with the potential decline in AD value vs. $ and want to hedge the position. The research department has provided following data to assist you with your hedging decision.

Currency Options available from the Philadelphia Stock Exchange
Type	Exercise price	Premium	Maturity date
Call	US$0.7800	US$0.015 per AD	12/21/2020
Put	US$0.7720	US$0.034 per AD	12/21/2020

Annual money market interest rates
Rates	U.S.	Australia
Borrowing	5.82%	5.20%
Deposit	1.90%	1.64%

In addition, the following are the actual and expected spot and futures prices for December 1, 2020 and December 21, 2020.

Prices	Actual rates on 12/1/2020	Assume actual rates on 12/21/2020
Spot exchange rate	US$0.7528	US$0.7682
January 2021 futures price (settlement price)	US$0.7598	US$0.7726

On December 1, 2020, GE and PNC entered into a 20-day forward contract (the forward contract matures on December 21, 2020). The agreed forward rate is US$0.7615 per AD.

Additional information:

• One futures contract on AD is for AD100,000
• One options contract on AD is for AD10,000

Given above information, answer the following five questions.

1. Determine whether a

1. 100% forward hedge;
2. 100% money market hedge;
3. 100% options hedge;
4. 100% futures contract hedge;
5. 65% with forward and 35% with currency option; or
6. No hedging

would be the most appropriate (that is, will result in the largest $ cash inflow). Show all your calculations.

2. If GEs objective is to obtain 100% hedging, should GE hedge with futures contracts? Using the data provided in the previous page, list and explain two main reasons. Be specific. Simple stating Yes or No is not enough.

3. On December 1, 2020, will GE buy or sell futures contracts? Using the data provided in the previous page, provide a numerical explanation why GE will either buy or sell futures contracts on December 1, 2020. Simply stating buy or sell is not sufficient.

4. As explained in the previous page, on December 1, GE and PNC entered a forward contract that matures on December 21, 2020. Did PNC experience an opportunity cost by entering the forward contract with GE on December 1, 2020? If yes, calculate the actual opportunity cost and show all your calculations. If not, provide an explanation. Simply stating Yes or No is not enough.

5. Find the spot exchange rate on December 21, 2020 that will leave GE indifferent between money market hedging and currency option hedging strategy. Show all your calculations.