OptiGuard Co is a company based in the United Kingdom (UK). The functional currency used is the British pound (). OptiGuard Co buys raw materials and components from US-based suppliers and sells their manufactured products to US-based customers.

US supplier

OptiGuard Co has placed an order for specialised weather-damage resistant glass panels from a US supplier. The order for these frames was $1.2 million, and payment must be made in US $ in one months time.

US customer

A new unvetted US-based customer has placed an order of $16 million to develop and manufacture high-strength clear glass roofs to meet their specifications. The cost of the first prototypes to be developed and manufactured for testing before production commences on the contract is $2.8 million. No deposit was required, where the full payment for the development and manufacturing of the prototype glass roof panels, to be received from the customer, will be in US $ in three months time.

The following payments and receipts are due within the next three months: Due in 1 month	US $
Payments to suppliers	1 200 000
Due in 3 months	US $
Receipts from customers	2 800 000

2.1 Calculate the payment that OptiGuard Co is expected to pay in one month to the US supplier if it:

(a) hedges the risk using the forward market. (2 marks)

(b) hedges the risk using the money market. (3 marks)

(c) does not hedge the risk and the $ to 1 spot exchange rates in one months time are 1.2192 1.2421. (1 mark)

2.2 Calculate the receipt that OptiGuard Co will expect to receive in three months from the US customer if it:

(a) hedges the risk using the forward market. (2 marks)

(b) hedges the risk using the money market. (3 marks)

(c) does not hedge the risk and the $ to 1 spot exchange rates in three months time are 1.2017 1.2353. (1 mark)

2.3 Explain the factors that OptiGuard Co should consider before deciding to hedge the risk using the foreign-currency markets, and identify any alternative actions available to minimise risk. (5 marks)

2.4 Briefly explain what is meant by foreign currency options and provide examples of the advantages and disadvantages of exchange traded foreign currency options. (5 marks)

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