Silverlit plc (SLP) is a large electronics retailer based in South Wales. SLP imports television sets from Hong Kong and has entered into a HKD 20 million contract with its main supplier to purchase Smart 4K Ultra HD HDR OLED television sets in various screen sizes. SLP is confident in selling these sets as the prices will be set at half of the major brands sets. The contract is to be paid in 6 months time (today is 1st June). SLP wishes to hedge against the foreign exchange risk, and is considering the following alternatives:

i) Purchase a currency put option through its bank at a premium of 0.001 per HKD. The strike would be HKD10.000 per 1.

ii) Purchase the HK dollars on the spot market and make the payment immediately.

iii) Purchase December Sterling futures contracts which will be settled in 6 months time. The futures contract size is HKD 125,000. The tick value is 12.50, and one tick at 0.01 pence per HKD. December Sterling futures contracts are currently priced at 0.0945 per HKD.

Current rates are as follows:

	BID	OFFER
Spot HKD per 1	10.800	11.000
Annual Interest Rate
UK	4%	5%
HongKong	6%	7%

The Bank's estomates in 6months' time

	Bid	Offer
Futures Contract Price	0.0999 per HK$	0.1020 per HK$
Spot per HKD	0.1111 (mid)

a) Assume all the banks forecasts are accurate. Calculate the cost in Sterling for each of the three alternatives.

b) There is a possibility for a fourth hedging alternative. Identify and explain what this fourth alternative may be.

c) Evaluate the results obtained in parts a) and b) above and make a recommendation. Assume the company is skeptical of the banks estimates.

d) If the interest rates for both currencies are three-month rates (instead of annual rates), discuss potential upside versus downside protection offered by a money market hedge (if any).

e) If the Spot rate ( per HKD) turned out to be 0.0950 in 6 months, evaluate the potential upside versus downside protection offered by the forward hedge and the option hedge (if any). Your answer should be supported by relevant calculations.