Space exploration Plc is seeking to construct a space station near Mars, the planet with the highest level of radiation. Gold will be used to lubricate the station’s mechanical parts, conducts electricity and coat the inside of the space station vehicle to protect people inside from infrared radiation and heat.
The requirement is to purchase 1000 ounces of pure gold from Real Rinto. A major gold producer in Australia, The parties have signed a supply contract at USD 1300 per oz with payment to be made in British pound in three month time. The exchange rate was set at GBP1 = USD 1.2500. However, contract completion is subjected to approval by the relevant authorities, the outcome to be known in 2 months’ time.Real RInto needs to hedge the foreign gold exposure because of the because of the increasing volatility of the pound post-Brexit.
(i) Real Rinto seeks your help to advise if it should use the gold future contract or options on the Gold features contract to Hedge its position. Provide your reasoned recommendation to the company. (Which will be better method to hedge)?
(ii) Real Rinto has obtained the forward rate bid /offer quote of Australian dollars per pound, GBP1.7200 / 50 for settlement in 3 months Compute the local receipt for Real Rinto (AUD). Do calculation. Answer must relate to the quotation not only given answer from text book must linked to quotation.