Assume that the futures price of GPB on Wednesday is given as follows:

Month	Open	High	Low	Last	Change	Settle	Estimated Volume	Prior Day Open Interest
DEC 16	1.2681	1.2685	1.2572	1.2633	-.0056	1.2625	102,579	220,467
MAR 17	1.2714	1.2714	1.2600	1.2655B	-.0057	1.2652	4,138	22,355

Assume that the spot price on Wednesday: 1.2552.

You expect to receive 400,000 British Pounds at a close of business day on Wednesday. You decide to hedge your risk with futures contracts. Assume that you enter into the position at close of day on Monday at the futures price of 1.2727. The size of one futures contract on British Pound is 62,500 pounds.

a.Describe the position you decide to enter (long or short, how many contracts and contracts maturity).

b.Document the price gain or loss every day that your position is open (Tuesday and Wednesday).

c.What is the total cost in US$ after you have closed out your futures positions, and completed the spot market transaction?

d.What would have been the total cost in US$, if you had not hedged? Did you benefit from hedging?

e.What would be the effective price per British Pound?