A U.S. firm is receiving 7.4m GBP in August. August GBP Futures are available on the Chicago Mercantile Exchange (CME) and currently trade at 1.2494 GBP/USD. The contract has an initial margin of 110% of the maintenance margin.

a) Describe the firms FX spot market currency exposure (long/short, size of exposure) before

hedging.

b) Describe how this firm would hedge its position using futures contracts.

c) How many contract positions on the CME should be taken if the goal is to minimize the firms exposure to risk?

d) What will be the total initial futures cash flow required (amount and currency)?

e) Assuming that the exposure and contract maturity dates are the same, what is the expected total (Physical + Hedge) net USD cashflow? (You may ignore the time value of money and you may assume that the Unbiased Expectations Hypothesis holds)