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ACCA Applied Skills · Financial Management · Hedging techniques for foreign currency risk

A US company will receive £1,000,000 in three months and sells 16 sterling futures contracts (contract size £62,500) at $1.2600. The contract expires in four months, and spot is $1.2500 now. Assume the basis reduces to zero linearly by expiry. At the end of three months spot is $1.2380. Ignoring margin and transaction costs, what is the net dollar receipt, and what closing futures price is implied?

The net receipt is $1,257,500. Basis of 0.0100 falls to 0.0025 with one month to expiry, so the closing futures price is 1.2405. The sold futures gain $19,500, which is added to the $1,238,000 spot receipt.

  1. A$1,258,000
  2. B$1,257,500Correct
  3. C$1,250,000
  4. D$1,218,500

Explanation

Opening basis = 1.2600 − 1.2500 = 0.0100. One month of four remains at closing, so basis = 0.0025 and closing futures = 1.2380 + 0.0025 = 1.2405. The futures gain on the sold contracts = (1.2600 − 1.2405) × 1,000,000 = $19,500. Net = 1,238,000 + 19,500 = $1,257,500. Assuming zero basis gives $1,258,000.

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