Assume a U.S. firm today (Day 1) buys 987,000 British pounds worth of goods in the U.K. to be paid at expiration.  Answer the following questions:

 

Day 1 $1.2939 / GBP 1 Expiration $1.2026 / GBP 1  

 

a. How many $ do they expect to receive at expiration? 

 

b. At expiration how many $ will they actually receive? 

 

c. What is the difference between $ expected and $ actually received?

 

d. If on Day 1 they want to hedge their currency risk, should they buy or sell pound futures contracts?

 

e. How many contracts should they buy/sell?  

 

f. At expiration, how many dollars did they gain / lose on their futures position?

 

g. Does the Gain/Loss in the futures market offset the difference calculated in question ?  If not, what is the difference (plus or minus)