HELP!!!Foreign Exchange Risk Management

BRB Construction is an Irish construction company that won a multimillion project to construct a new business school campus for Royal Holloway University in London at the end of 2019. The total value of the project is 25 million. The project was won against very strong competition and the profit margins are relatively low. The business was willing to accept a lower than usual profit margin of 20% in order to secure a prestigious construction project in a new target market.

Construction is set to begin in April 2020, with a planned completion in August 2021. The project involves a series of staged payments by the university over the course of 2020 and the first half of 2021. The following are the planned payments, each occurring at the end of the relevant month - April 2020 2 million; July 2020 3 million; September 2020 3 million; December 2020 3 million; June 2021 4 million; August 2021 (subject to completion certification) 10 million. The Finance Director is concerned at the potential for adverse movements in Sterling that could erode the profit margin on the project. The Finance Director says that the project was priced at a EUR/GBP rate of 0.9200. The following are indicative current forward points.

You have received the following indicative premiums for a Sterling put option at a strike price of 0.9200: July 2020 3%; September 2020 3.4%; December 2020 4%; June 2021 4.5%; August 2021 5.5%. The premium is a percentage of the notional principal.

As a rule of thumb you are informed that setting a strike price at each additional penny out of the money will reduce the option premium by 0.2% subject to a minimum premium of 2%. Setting a strike price at each additional penny in of the money will increase the option premium by 0.3% with no maximum premium.

Based on your view of EUR/GBP exchange rate over the life of the project and the business commercial position, advise the Finance Director on an appropriate hedging strategy.

HELP!!!HELP!!! EUR/GBP Spot and Forward Points 0.9037/45 9 months 48/62 (HELP!!!) Spot 1 month 2 months 3 months 4 months 5 months 6 months 5/7 9/13 16/18 20/26 28/31 31/39 12 months 15 months 18 months 24 months 71/79 79/112 110/145 148/173 HELP!!!HELP!!! EUR/GBP Spot and Forward Points 0.9037/45 9 months 48/62 (HELP!!!) Spot 1 month 2 months 3 months 4 months 5 months 6 months 5/7 9/13 16/18 20/26 28/31 31/39 12 months 15 months 18 months 24 months 71/79 79/112 110/145 148/173