Question -
Beazley Development plc is a medium sized manufacturing company selling caravan spares mainly in the USA and Europe. The treasury department expects to receive a substantial sum of money in the next 6 months, expected to be $10,000,000 representing the sale of one of its subsidiaries in the USA. There is some concern that dollar will weaken against pound although this is not the consensus of the whole department. However, they all agree that a currency hedge would be sensible.
It is now May 1st 2013 and the treasury department of Beazley Development plc is contemplating a hedging strategy using either currency futures or currency options. The following data is available to the treasury department to help them make decisions:
US Dollars
Spot 1.6462 - 1.6474
1 month 0.42c pm - 0.38c pm
2 months 0.55c pm - 0.48c pm
3 months 0.65C Pm - 0.60c Pm
4 months 0.70c pm - 0.62c pm
Futures market contract prices:
Sterling £62,500 contracts (tick value $6.25)
June contract 1.6551
September contract 1.6565
December contract 1.6600
Currency options:
Sterling £31,250 contracts (cents per £)
Calls Puts
Exercise price Sep Sep
$1,800/£ 0.60 1.66
Calls Puts
Exercise price Nov Nov
$1.6000/£ 0.80 1.88
Required -
a. Assuming the franchise is won, illustrate the results of using futures and option currency hedges if the US$/£ spot exchange rate and futures price at the end of November is:
i. $1.50
ii. $1.70
b. Evaluate the internal methods available to the treasury department before they resort to external hedging techniques.
Subject is Corporate Finance. Please answer as much details as possible. Thanks.