Ican 2022 Strategic Financial Management Question 6

You have worked with a major oil servicing company in Nigeria, with headquarters in the USA, for the past six years. Recently you completed your ICAN examinations and you have been asked to join the international treasury department in New York City for a two-year attachment. The company is due to pay a UK supplier the sum of ₤5million in three months time. Your team is considering alternative methods of hedging the expected payment against adverse movements in exchange rate. Exchange rate information US$ per ₤1 Spot rate 1.9410 – 1.9531 One – month forward rate 1.9339 – 1.9452 Three – month forward rate 1.9223 – 1.9339 Futures market (contract size of ₤62,500, Quotation: US$ per ₤) 2-month expiry 1.9305 5-month expiry 1.9170 Options market (₤31,250 contracts size, premiums are quoted in cents per ₤1) Call option Put option Exercise 2-month 5-month 2-month 5-month price expiry expiry expiry expiry 1.9000 2.88 3.55 0.15 0.28 1.9200 1.59 2.32 1.00 1.85 1.9400 0.96 1.15 2.05 2.95 You are required to advise the company which of the following hedging strategies should be adopted for the payment due to be made in three months. Show all workings.