EXERCISES (2017/2018) Case 1 A U.S. company has bought industrial equipment from a U.K. firm for 5 million payable in 60 days. The company believes that UK's political and economic uncertainty might drive the pound sterling down significantly. Design a hedging strategy for the corporation by employing either forward currency contracts or currency options and utilizing the data listed below. Case 2 A U.S. fund manager who bought 100 million in Australian dollar (AS) bonds when the AS was at USS/AS 0.72 is worried that the AS might depreciate because of disappointing Australian economic performance. He decides to set $/A$ 0.72 as the maximum downside loss that he wants to risk from the current level of S/AS 0.7850 (spot). The fund manager doesn't mind foregoing profit opportunities from a further upward move in the AS and is uncertain how long he will hold the bonds. He sets the year end as his time horizon. By utilizing the data below, which hedging strategy should the fund manager adopt? Currency Exchange Rate Interest Rate Contract Spot Forward US Foreign Option Type Strike Maturity Premium per FC S/f S/AS 0.0176 0.007211 1.50 1.4818 3.2 5.8657 CALL 1.5 60 0785 0.76 3.2 5.7892 PUT 0.72 195