In February 2017, a British company contracted to import medical equipment from
ID: 393573 • Letter: I
Question
In February 2017, a British company contracted to import medical equipment from the United States and a payment of USD 800,000 was due on 15 June 2017. In February, the company obtained this information from its banker:
GBP/USD futures contract size : GBP 62,500
GBP/USD futures contract for June 2017 delivery : GBP1 = USD 1.2720
Spot rate : GBP1 = USD 1.2660
On 15 June 2017, the GBP/USD futures contract for June 2017 delivery was quoted at GBP1 = USD1.2860. Assume the company used the futures hedge. Explain the futures hedge and compute the company’s final payment (in its local currency) for its import on 15 June 2017. Explain if this hedge was effective.
Explanation / Answer
1 Future contract size is GBP 62500 Amount to be paid USD 800000 GBP/USD futures contract for June 2017 delivery : GBP1 = USD 1.2720 So Amount to be paid in GBP 628931 No. of Future Contract 10.06289308 So we have to buy 10.063 Future contract Then the amount paid in GBP is 628931 Then again when June comes, the future and spot rate converges and it becomes 1 GBP = 1.286 USD Then total payment made as per current spot rate is GBP 622084 Gain for the company is GBP 6847 The hedge was effective