Malaika plc, a British company, is planning to make a payment in euros of €150 million at the end of September. However, the nearest maturity date for a euro futures contract is at 13 December and it is now 29 January. The face value of a one euro futures contract is €250,000. The spot rate today is €1.49/£ and the futures rate is €1.45/£.

1 Estimate the number of futures contracts required.

2 Assume that at the end of September, the spot rate turns out to be €1.55/£ and a futures contract is taken out at the end of September to expire on 13 December is quoted at €1.50/£. Estimate the total gain or loss earned by Malaika plc. 

3 Review the primary differences between hedging with futures and hedging with forwards. 

4 Explain what is meant by a currency option. Provide a worked example of a currency options strategy and the reasons for its use. Explain why currency put options are not necessarily a bearish investment.