A UK firm exports equipment to Hong Kong. It has contracted to receive HKD10 million in 3 months from its client. Today, the rates are as follows:

Spot rate: Great British Pounds (GBP) 1 = Bid HKD 9.50 and Offer HKD 9.54

HKD/GBP futures price = GBP 0.0950 per HKD

The UK firm is concerned about movements in the GBP/HKD exchange rate. Its recently employed finance officer forecasts these data in 3 months:

Spot rate: GBP1 = Bid HKD 8.95 and Offer HKD 9.20

GBP/HKD futures = HKD 10.0000 per GBP

The specifications for the HKD/GBP futures contract are as follows:

Contract Size: HKD125,000

Minimum fluctuation: 1 tick (0.0001) equals GBP12.50 per contract.

Required:

a.If the firm uses the futures contract hedge, explain the hedging action that it should undertake. Also compute the number of futures contracts required for the hedge.[6 marks]

b.Using the futures hedge, calculate the net GBP inflow in 3 months if the finance officer's forecasts came true. [8 marks]

c.Compute the gain/loss in GBP in the spot market and comment on the result. [5 marks]

d.Briefly discuss two disadvantages of the UK firm hedging using a futures contract, which are not applicable in using options contract hedging.