Question 2 Barilla is an Italian company which has just signed a contract on 1st Dec 2019 to import 1,000,000 wheat from a UK farmer. The payment is due in three months' time. Given the economic uncertainty created by the Covid-19 pandemic, the board of Barilla expect a steep depreciation of Euro against the Sterling, hence they are considering two alternative ways to hedge their currency exposure. 1. A futures hedge 2. A money market hedge Market Data at 1st Dec 2019: Exchange rates: Spot EUR/GBP 1.3200 3-month Forward EUR/GBP 1.3000 Currency futures: CME 125,000 March 2020 Contract (cash-settled): 1.25001. Tick value 12.50 per contract. Interest rates (borrowing and lending): - Italy 3% per annum - UK 6% per annum The future spot exchange rate is expected to move to either of the following rates: i EUR/GBP 1.2100 ii. EUR/GBP 1.3300 3 CONTINUES NEXT PAGE Evaluate the performance of the two alternative hedging methods in 3 months' time given the two future spot rates scenarios expected by the company by answering the following questions: a) In both scenarios, Il Barilla uses futures contracts, explain the following: - How many contracts the company must sell? [4 marks] Does the company need to sell or buy the futures contract? Explain. [6 marks) What is the gain/loss in number of ticks if the company hedges with futures contracts? How much is the gain/loss translated into ? [6 marks] What is the total payable amount for the company after hedging with futures contracts? [6 marks]