ODINGO Co. is company based in the USA, supplying gemstones to the USA and Europe. It is 21st December 2022 JODINGO Co's Treasury Department is currently dealing with a sale to a Swiss customer for CHF 12.3 million who will pay for the gemstones on 20th June 2023. The treasury Department intends to hedge the foreign exchange risk on this transaction using traded futures or options as far as possible. Any amount not hedged by a futures or options contract will be hedged on the forward market. Exchange rates (quoted as US $/CHF 1) Spot 10.292------10.309 Three months forward 10.327------10.347 Six months forward 10.358------10.380 Current futures (contract size CHF 125,000, futures price quoted as US $ per CHF 1) Futures price: December 10.318 March 10.345 June 10.369 Currency options Contact size CHF 125,000 Exercise price quotation US$ per CHF1 Premium: US $ cents per CHF 1 Exercise price: 10.385 December March June Call 4.50 5.00 5.30 Puts 7.4 7.9 9.00 Futures and options contracts mature at the month end Non-executive Director's comments A new Non-executive Director has recently been briefed about the work of the Treasury Department and has a number of questions about hedging activities. He wants to understand the significance of basis risk in relation to futures. He also wants to know the significant features of the over-the-counter forward contracts and options, why JODINGO Co. Prefers to use exchange traded derivatives for hedging The Non-executive Director has also heard about the mark-to-market process and he wants to understand the terminology involved, and how the process works, using the transaction with the Swiss customer as an example. The treasury Department has supplied relevant information to answer his query. The contact specification for the CHF futures contract states that an initial margin of US$ 1,540 per contract will be required and a maintenance margin of US $ 1,460 per contract will also be required. The tick size on the contract is US$ 0.0001 and the tick value is US $ 12.50. You assume on the first day when JODINGO Co. Holds the future contracts, the loss per contract is $ 0.0020. REQUIRED 1) Evaluate which of the exchange traded derivatives would give JODINGO Co. The higher receipts, considering scenarios when the options are exercised and not (10 marks) 2) Discuss the benefits and drawbacks for JODINGO Co. In using forward contract compared with using over-the-counter currency options, and explain why JODINGO may prefer to use exchange-traded derivatives rather than over-the counter derivatives to hedge foreign currency risk. (5 marks) 3) Explain to Non-executive Director how the mark-to-market process would work for the CHF futures, including the significance of the data supplied by the treasury Department. Illustrate your explanation with calculations showing what would happen on the first day, using the data supplied by Treasury Department. ( 5 marks) b) Suppose a trader opens a short position in two rice futures contracts. Each contract is for 5,000 kilograms. The initial margin is TZS 2,000,000 per contract, and the contract expires in 100 says. Suppose the future price decreases by TZS 500 per Kilogram per day for the first 10 days, then increases by TZS 750 per kilogram per day for the next 5 days.

REQUIRED: Estimate the following:

• The initial margin to be deposited with clearing house

• The total gain/loss due to price decreases

• The total gain/loss due to price increase

• The balance in the trader's margin a/c after 15 days