Question

a)Should a U.S. firm take a long or short position in British Pound futures if it wants to hedge against payables in British Pound? Explain you answer.

b)Should a U.S. firm buy a call option or buy a put option on Japanese Yen if it wants to hedge against receivables in Japanese Yen? Explain your answer.

c)What are the main differences between forward/futures vs. options as a hedging tool?

d) Assume that the transactions listed in the first column of the following table are anticipated by U.S. firms that have no other foreign transactions. Place an “X” in the table wherever you see possible ways to hedge each of the transactions.

            1.   Georgetown Co. plans to purchase Japanese goods denominated in yen.

            2   Harvard, Inc., sold goods to Japan, denominated in yen

3.   Yale Corp. has a subsidiary in Australia that will be remitting funds to the U.S. parent.

4 Brown, Inc., needs to pay off existing loans that are denominated in Canadian dollars.

Princeton Co. may purchase a company in Japan in the near future (but the deal may not go through).

                 Forward Contract                    Futures Contract                    Options Contract

               Forward         Forward                  Buy               Sell                  Purchase       Purchase

               Purchase           Sale                  Futures          Futures                  Calls              Puts  

      a.                                                                                                           

      b.                                                                                                                                

      c.                                                                                                                                 

      d.                                                                                                           

      e.