BP is one of the largest international companies in the oil & gas industry. The...
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Accounting
BP is one of the largest international companies in the oil & gas industry. The company has transactions denominated in several currencies. Being a British company, the domestic currency used for valuation is the British pound.
In 3 months, BP is due to receive a 41.5m ZAR reimbursement from a major subsidiary in South Africa.
You have the following information:
Table 1: Banks spot and forward rates (in points)
Bid
Ask
GBPZAR
19.6971
19.7183
GBPZAR 3M FWD
3104.8000
3139.0000
Table 2: CME Currency Futures
Settlement
Contract Units
GBPZAR 3M
19.8911
125,000
Table 3: OTC Currency Options
Strike
Call (in )
Put (in )
GBPZAR
19.8925
0.031
0.025
The spot exchange rate in 3 months is expected to be either 19.7762 or 20.1556.
1.1 Calculate the outcome of hedging using forwards.
1.2 Calculate the outcome of hedging using futures.
1.3 Calculate the outcome of hedging using options.
1.4 Recommend a strategy to BP under the two scenarios briefly discussing the differences between each strategy.
Answer & Explanation
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