British Fashion Plc, a British multinational clothing company, has just signed an export contract today (June 1st) with the value of USD 20 million and is expecting to receive full payment after six months.

Your task is to review the appropriateness of using Futures to hedge the potential exchange rate risk for the receivable amount.

The current market data available are:

Current GBP/USD spot: 1.1935-1.2042

Futures market contract prices

Sterling GBP 62,500 contracts

June 1.29

September 1.30

December 1.31

Required: If the GBP/USD spot exchange rate and future price when the receivable amount is due is 1.22:

a. Determine which month's future contract should be used.

b. Determine the number of future contracts to be used.

c. Calculate the net cost and receipt of using futures contracts to hedge.