BP is one of the largest international companies in the oil & gas industry. The company has transactions denominated in several currencies. Being a British company, the domestic currency used for valuation is the British pound. In 3 months, BP is due to receive a 41.5m ZAR reimbursement from a major subsidiary in South Africa. You have the following information: Table 1: Bank’s spot and forward rates (in points) Bid Ask GBPZAR 19.6971 19.7183 GBPZAR 3M FWD 3104.8000 3139.0000 Table 2: CME Currency Futures Settlement Contract Units GBPZAR 3M 19.8911 125,000 Table 3: OTC Currency Options Strike Call (in £) Put (in £) GBPZAR 19.8925 0.031 0.025 The spot exchange rate in 3 months is expected to be either 19.7762 or 20.1556. Calculate the outcome of hedging using forwards. Calculate the outcome of hedging using futures. Calculate the outcome of hedging using options. Recommend a strategy to BP under the two scenarios briefly discussing the differences between each strategy.
BP is one of the largest international companies in the oil & gas industry. The company has transactions denominated in several currencies. Being a British company, the domestic currency used for valuation is the British pound. In 3 months, BP is due to receive a 41.5m ZAR reimbursement from a major subsidiary in South Africa. You have the following information: Table 1: Bank’s spot and forward rates (in points) Bid Ask GBPZAR 19.6971 19.7183 GBPZAR 3M FWD 3104.8000 3139.0000 Table 2: CME Currency Futures Settlement Contract Units GBPZAR 3M 19.8911 125,000 Table 3: OTC Currency Options Strike Call (in £) Put (in £) GBPZAR 19.8925 0.031 0.025 The spot exchange rate in 3 months is expected to be either 19.7762 or 20.1556. Calculate the outcome of hedging using forwards. Calculate the outcome of hedging using futures. Calculate the outcome of hedging using options. Recommend a strategy to BP under the two scenarios briefly discussing the differences between each strategy.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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BP is one of the largest international companies in the oil & gas industry. The company has transactions denominated in several currencies. Being a British company, the domestic currency used for valuation is the British pound.
In 3 months, BP is due to receive a 41.5m ZAR reimbursement from a major subsidiary in South Africa.
You have the following information:
Table 1: Bank’s spot and forward rates (in points)
|
|
Bid |
Ask |
|
GBPZAR |
19.6971 |
19.7183 |
|
GBPZAR 3M FWD |
3104.8000 |
3139.0000 |
Table 2: CME Currency Futures
|
|
Settlement |
Contract Units |
|
GBPZAR 3M |
19.8911 |
125,000 |
Table 3: OTC Currency Options
|
Strike |
Call (in £) |
Put (in £) |
|
|
GBPZAR |
19.8925 |
0.031 |
0.025 |
The spot exchange rate in 3 months is expected to be either 19.7762 or 20.1556.
- Calculate the outcome of hedging using forwards.
- Calculate the outcome of hedging using futures.
- Calculate the outcome of hedging using options.
- Recommend a strategy to BP under the two scenarios briefly discussing the differences between each strategy.
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