Question 5 Lido Company is a defense weapons manufacturer based in the United States and sells its products all over the world. The CFO is currently analyzing the following hedging strategies which will be needed over the next six months: a) The company recently received an order for 200 of its specialized armored vehicles from a customer located in Europe. The sale will be denominated in Euros (E) and will result in a cash receipt of 50 million. The CFO is therefore seeking to hedge the transaction by entering into a forward contract which is currently priced at $0.877. b) To manufacture the above order, Lido will need to purchase 400,000 pounds of copper at the start of production in two months' time or at the beginning of September. The CFO is concerned about increases in the price of the raw material during the next two months and therefore decides to hedge its position by purchasing futures contracts on half of its expected needs at the final price of the day based on the below quote: Copper-25,000 lbs.; cents per lb. July 227.00 September 229.2 Open High Low Settle 228.0 227.0 228.0 231.6 226.4 230.0 Previous Settle 232.5 236.0 c) Lido Company currently has debt of $50 million in floating-rate notes which will expire in one year and pay a rate of LIBOR plus 125 basis points. Lido's management believes TURN OVER Required: (i) Discuss three forms of risks to which Lido Company is currently exposed to. (ii) (iii) (iv) Indicate how the company would go about constructing the hedge needed in part (a) above. Explain what happens when the forward contract expires in two months. Calculate the gain or loss which would be incurred in part (b) above if the market price turns out to be 228 cents per lb. on the settlement date. Calculate the overall net payment (including the loan) by the company in part (c) above for the upcoming quarter. Assume that all payments will be made on the basis of 90/360.