QUESTION $02$:

Today is $1$ January $2023.$ The current spot rate is US $$\frac{1\mathrm{.}71110}{}.$ ABC Plc$.,$ a

UK company, has a US $$6,650,000$ invoice to pay on $25$ April $2023.$ ABC is

concerned that exchange rate fluctuations could increase the $$ cost and,

hence, seek to effectively fix the $$ cost using currency futures. The futures'

contract size is $100,000$ and the following futures prices are available:

March expiry

US$$1\mathrm{.}71205/$

June expiry

US$$1\mathrm{.}71035/$

September expiry

US$$1\mathrm{.}70865/$

Required:

a$)$ Set up the hedge $($Hint: Round the contract numbers to the nearest whole

number$).$

$(06$ Marks$)$

b$)$ Compute the result of using the currency futures hedge on ${25}^{th}$ April $2023,$

if the applicable currency future is trading at US $$\frac{1\mathrm{.}65750}{}$ and the spot

rate is US$$1\mathrm{.}65770/.$

$(12$ Marks$)$

c$)$ Calculate the hedging efficiency

$(02$ Marks$)$