Britains cabinet minister, Mr Liam Fox said the Prime Ministers Brexit deal with the European Union (EU) was unlikely to pass through Parliament. Other options include leaving the EU without a deal, another referendum, or a Norway or a Canada-style alternative deals. Norway has a very close relationship with the EU but is not a member, while Canada has an extensive trade deal with the bloc.

Reference: Bloomberg 2018, Brexit: What happens next may have to be put to MPs' vote Fox. Available from: https://www.bbc.com/news/uk-politics-46584654 Accessed 17 December 2018.

Amidst the uncertainty surrounding the fate of the Brexit deal, the sterling swung within a wide trading range as seen in the rates between 10 December 2018 and 19 December 2018 in the table below.

Bank dealer X performed a number of foreign currency trades on the British pounds against the US dollar during this period. She trades standard contracts (size USD100,000) with a leverage ratio of 1:200. The online broker takes a 5-pip spread on either side of the spot mid-rate. These were the dealers trades:

10 Dec 2018 to

19 Dec 2018

US dollars per GBP

(Spot, mid-rates)

Trades

T = 0

1.2750

Sell 5 contracts

T = 1

1.2500

Buy 8 contracts

T = 2

1.2630

Sell 4 contracts

T = 3

1.2480

Buy 6 contracts

T = 4

(19 December 2018)

1.2620

Sell 5 contracts

Required:

a. Calculate the bank dealers net profit/loss after executing all her trades. Ignore margin considerations and other transaction costs (apart from the bid-offer spread). [8 marks]

b. In mid-June 2018, a British export firm contracted to receive USD 1 million at T=4 from its United States customer. At that time, the company obtained this information from its banker:

Spot rate : GBP1 = USD 1.3330

GBP/USD futures contract size : GBP 62,500 GBP/USD futures for delivery on 19 December 2018 : GBP1 = USD 1.3450 Explain the futures hedge mechanism for the firm and compute the companys nett receipt (in its local currency) on19 December 2018. Explain if this hedge was effective.