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Polytot June 04 Mark Fielding-Pritchard mefielding.com1

Polytot  Simply work through the options in order  There as a peso/£ rate given so assume we can use it mefielding.com2 US$Pesos Receive(675mx 60%) /98.2= $4,124,236270m (156.30x 1.15)= £1,502,128 Therefore we are hedging $4,124,236

Polytot- Forward  Therefore we are hedging $4,124,236  A receipt in 4 months  Question give you 3 month rate and 1 year rate, extrapolate  = decline of 2.2c over 9 months. Therefore 1 month = 0.24c  4 month rate is =  4,124,236/1.5374= £ mefielding.com3

Polytot Options  Now is 1 July, receive money on 1 November- December  September expies too soon, March is too expensive  We need to take dollars and buy pounds- calls mefielding.com ,124,236/1.5250= £ /31250= 86 contracts Therefore on 1 July we buy 86 December Calls with a strike price of $1.5250

Polytot Options contd  1 July Premium cost = $0.335 x x 86= $90031  $90031/ = £58179 (ignore time cost of money)  Assuming spot on 1/11 is we will exercise mefielding.com5 $£ What we receive on exercise of option $(1.525 x x 86)= £(31250 x 86)= But we received more dollars, balance is exchanged at spot (4,124, )= $25798 (4,124, )/1.5374= £16780 Premium(58179) Total Receipt£

Polytot Futures  Hedging a receipt of 4,124,236 in 4 months on 1/11  We need to buy pounds so buy futures  December, September close too early  $4,124,236/ = £  /62500= 43 futures  Therefore on 1 July we buy 43 Decembers mefielding.com6

Polytot Futures  On 1 July basis risk inherent in December future is – = 235, expectation that the £ weakens  Assume basis risk declines evenly over time & futures close at month end  Therefore by 1 November 4/6 of basis risk will have dissipated and 78 remains (235 x 2/6)  At 1 November the spot rate is , therefore assumed future price is minus 78 = mefielding.com7

Polytot Futures- Close Out 1/11 mefielding.com8 £ Exchange dollars at spot$4,124,236/1.5374£ Close future Bought at Sold at Profit $0.0021x 62500x 43= /1.5374= £3671 Total Received£

Polytot Hedging Summary mefielding.com9 Total £s ReceivedEffective Hedge Rate Forward£ Option£ Future£

Polytot b)  Need agreement from supermarket, contract  What are the risks of strawberries, - Transportation - Quality - Price - Payment terms - Who bears risks, incoterms - Outlook for Grobbian Peso mefielding.com10