A company located in the UK may need to advance to its US subsidiary an amount of $15,000,000 at the end of June. The firm believes that the US dollar will strengthen over the next few months, and a currency hedge would be sensible. It is now 1st March. The following data is relevant.

Exchange rates US$/

1st March spot 1.44611.4492;

4 months forward 1.42901.4351.

Futures market contract prices

Sterling 62,500 contracts (Contract price $ per 1):

March contract 1.4430

June contract 1.4312

September contract 1.4300

December contract 1.4281

Required

1. Do you think the firms belief that the US dollar is likely to strengthen against the UK pound is justified?

2. What are the relative merits of forward currency contracts and currency futures contracts as instruments for hedging in the given situation?

3. Calculate the results of using forward and future currency hedges if the US$/ spot exchange rate at the end of June is 1.4505.