Required: (a) Evaluate the best cash flow in pounds that Panger might expect after hedging its trade transactions during the next six months. Include in your evaluation a brief discussion of advantages and disadvantages of the alternative hedging techniques which could be used. All relevant calculations must be shown. [40 marks]

(b) Panger would like to use currency options but considers that the premiums are too high. Demonstrate:

(i) How Panger might use a collar to reduce the option cost whilst still ensuring a worst case outcome of $1.30/ (excluding any net option premium)

(ii) How Panger might use a range forward to result in a zero option premium and a worst case outcome of $1.30/. In both cases discuss the implications of such actions for Pangers hedge position, and comment upon which hedge would be better for Panger. [10 marks] [Total 50 marks]

2. Panger plc is a multinational company based in the UK. It produces electronic goods, mainly for export to the USA. Components for the electronic goods are regularly purchased in Thailand, processed in the UK, and then exported to the USA. Processing and other costs in the UK average 50% of the current spot purchase price of the components in Thailand. Assume that it is now 1 January. The following transactions are expected during the next 6 months. Thai payments Bahts 38.3 million $US receipts 1 March 1 July $2.2 million Other information: Borrowing Investing Interest rates (annual) UK Thailand USA 3.5% 6% 2.5% 1.5% 4% 1.0% Turn Over BUSI3014.N13313E1-19 Exchange Rates Bahts/ US$/ 42.84 - 42.89 1.3047 - 1.3060 43.90 - 44.09 1.2963 - 1.2983 Spot 3 months forward 6 months forward 44.54 - 44.58 1.2882 - 1.2889 CME Futures (Bahts 1,000,000) /Bahts March 0.0227 June 0.0224 US $/ Strike price 1.29 1.30 1.31 CME group Options (62,500) US Cents/ Calls Puts March June March June 3.76 5.98 2.10 3.23 3.10 4.79 2.95 3.65 2.21 3.83 3.61 4.68 Assume that futures and options contracts expire at the month end. 2. Panger plc is a multinational company based in the UK. It produces electronic goods, mainly for export to the USA. Components for the electronic goods are regularly purchased in Thailand, processed in the UK, and then exported to the USA. Processing and other costs in the UK average 50% of the current spot purchase price of the components in Thailand. Assume that it is now 1 January. The following transactions are expected during the next 6 months. Thai payments Bahts 38.3 million $US receipts 1 March 1 July $2.2 million Other information: Borrowing Investing Interest rates (annual) UK Thailand USA 3.5% 6% 2.5% 1.5% 4% 1.0% Turn Over BUSI3014.N13313E1-19 Exchange Rates Bahts/ US$/ 42.84 - 42.89 1.3047 - 1.3060 43.90 - 44.09 1.2963 - 1.2983 Spot 3 months forward 6 months forward 44.54 - 44.58 1.2882 - 1.2889 CME Futures (Bahts 1,000,000) /Bahts March 0.0227 June 0.0224 US $/ Strike price 1.29 1.30 1.31 CME group Options (62,500) US Cents/ Calls Puts March June March June 3.76 5.98 2.10 3.23 3.10 4.79 2.95 3.65 2.21 3.83 3.61 4.68 Assume that futures and options contracts expire at the month end