A UK company expects to receive US$500,000 in 6 months. The spot exchange rate is $1.3011/. To hedge the exchange rate risk the company entered a forward contract to sell US$500,000 at an exchange rate of $1.3275/. a. Calculate the outcome of this hedging strategy if the spot exchange rate in six months is $1.2865/. (5 marks) b. Calculate the outcome of this hedging strategy if the spot exchange rate in six months is $1.3811/. (5 marks) c. Discuss how option contracts could be used as hedging strategy. (5 marks) d. Discuss differences between forward contracts and option contracts. (10 marks) Total 25

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