Financial Risk Management
Question
Assume you are a US company and expect to receive £ 24,540,000 in 3 months from now. Given the current economic environment in the US and globally, you fear that your company will be adversely affected and wishes to hedge to reduce its risk related to exchange rate changes. Based on this scenario, please answer the following questions:
(a) Identify ONE financial risk faced by the US company given the above scenario. Systematically review and critically evaluate research from a variety of sources to explain why you have identified this as a risk, and whether you would consider hedging. Please discuss in your answer the outlook for the underlying variable and cite evidence of an adverse and/or favourable direction. NB: reference list will not be part of the word count.
(b) For the risk, you have mentioned in part (a) please recommend a hedging strategy that is consistent with the outlook provided in part (a) and explain why you have chosen this strategy above all others .
(c) Irrespective of your answer above, assume you are using an exchange-traded option ‘combination’ strategy to hedge your risk. Please use real data from the CME group and provide the cost of the hedge , the strike prices used, and the number of contracts required. Please show all calculations and provide screenshots of the data obtained from the CME group.
