Q1

(a) A company based in the United Kingdom expects to have to pay 1 million dollars in nine months for imports from the United States. How can the treasury manager hedge the exchange rate risk using (i) a forward contract and (ii) an option? What is the difference between the two strategies?

(b) You recently got a job as a treasury manager at Helium One Plc, a young oil-producing company. You are proposing to the executive management of the company the use of futures contracts to hedge oil price risk. The response of the chief executive is that "using futures is similar to betting in the casino as you can never predict whether oil prices at maturity are going to be greater or lower than the futures price. I don't see the need therefore for using futures contracts". Discuss the executive's viewpoint.