FIN 449/MGMT 615

A company will receive 250,000 [GBP] in December. They are debating whether to enter into a three months future contract or do a synthetic forward.

If the company decides to use futures contracts, how many contracts do they need to use?

Is it best for the company to do a synthetic forward or enter into a futures contract?

In order to decide the best option, you need to find the value of the December futures contract for British Pounds, the spot exchange rate for British Pounds, and the yield of the three month U.S. Treasury bill. The three month Treasury bill issued by the Bank of England have a yield of 0.5 percent per year.

Another company have to pay 25 million Japanese Yen in December.

Should they enter into a futures contract for December or do a synthetic forward?

If it is best to use Futures contracts, how many contracts should they use?

In order to decide what is best you need the December futures for Japanese Yen, the spot exchange rate for Japanese Yen, and the yield of the three month U.S. Treasury bill. The three month Treasury bill issued by the Bank of Japan have a yield of 0.00846 percent per year.

The futures contracts settlement prices are in the CME Daily Bulletin (PG07), the spot rates in Oanda, and the U.S. treasury bill yields in the Treasury Department or Yahoo Finance.

Present a report with your calculations for both cases and the recommendations on what is the best option for each of the cases.