AZZ Ltd exports to the UK and currently has a receivable totaling 2.50 million next month.

Because of the Brexit risk, AZZ is interested in protecting these receipts against a drop in the

value of the pound. It can sell 30day pound futures at a price of $1.6513 per pound or it can

buy pound put options with a strike price of $1.6612 at a premium of 2.0 cents per pound. The

spot price of the pound is currently $1.6560, and the pound is expected to trade in the range of

$1.6250 to $1.7010. AZZ's treasurer believes that the most likely price of the pound in 30 days

will be $1.6400.

a. How many futures contracts will AZZ need to protect its receipts? How many options contracts? (2 marks)

b. Diagram AZZ's profit and loss associated with the put option position and the futures position within its range of expected exchange rates. Ignore transaction costs and margins. (6 marks)

c. Calculate what AZZ would gain or lose on the option and futures positions within the range of expected future exchange rates and if the pound settled at its most likely value. (6 marks)

d. Assume AZZ can borrow and lend at 6% p.a. Illustrate how the firm can implement a money market hedge to eliminate the currency risk. (4 marks)