QUESTION 2 A French company has decided to sell its British subsidiary for GBP 100m due to Brexit. The transaction requires regulatory approval and will complete in exactly one year's time. Scrooge Bank quotes the GBP EUR spot rate at 1.1650, 1 year EUR interest rate at 2% and the 1 year GBP interest rate at 4%. a) Using the rates given, what is the forward GBP:EUR exchange rate calculated using parity relations? 1.1652 1.1878 1.1426 You are a US bond fund manager who wants to buy a EUR 5,000,000 bond because she thinks the EUR yields will drop in the next few months. She does NOT want to run FX risk so she could enter into a FX swap but decides that a futures hedge could be more flexible as it is simpler to exit the hedge if the 3 months bond holding period changes. The CME EUR futures contract specification is EUR 125,000 per contract and both the spot and 3 months contract date are quoted at EUR:USD 1.1900. The contract initial margin is USD2,000 per contract. b) What trades does she need to execute to make the investment? Buy EUR spo sell the EUR bond spot, and sell EUR futures Buy EUR spot, buy the EUR bond spot and sell EUR futures Buy EUR spot, sell the EUR bond spot, and buy EUR futures Buy EUR spot, buy the EUR bond spot, and buy EUR futures