Question
A U. S. company anticipates that it will need to pay 1 million British pounds (GBP) to its British supplier in 2 months. The spot
A U. S. company anticipates that it will need to pay 1 million British pounds (GBP) to its British supplier in 2 months. The spot price of the GBP is USD 1.3828. A forward contract on GBP with a time to delivery of 2 months has a forward price of USD 1.3938. A futures contract on GBP with a time to delivery of 5 months has a futures price of USD 1.4158. The company has collected historical data on changes in the spot price of GBP and corresponding changes in the futures price of GBP. The company conducted a regression analysis of the change in the spot price on the change in the futures price and obtained the following results: Slope = 1.00, R-squared = 0.85. Consider the following statements. I. The company can execute a perfect hedge of the anticipated 1 million GBP payment with the forward contract. II. The company can execute a perfect hedge of the anticipated 1 million GBP payment with the futures contract. Which of the following is correct?
a. Statement I is incorrect, Statement II is correct. b. Statements I and II are both correct. c. Statement I is correct, Statement II is incorrect. d. Statements I and II are both incorrect.
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