PT Gas Co is a large multinational company in the UK with a number of subsidiary companies around the world. One of the subsidiary is Laxamana Co which is based in US. PT Gas Co is owing to Laxamana...

PT Gas Co is a large multinational company in the UK with a number of subsidiary companies around the world. One of the subsidiary is Laxamana Co which is based in US. PT Gas Co is owing to Laxamana Co amounted to US$2.4 million. PT Gas Co want to hedge against the USD strengthening against the £ because if the £ depreciates against the USD, then the PT Gas Co has to spend more £ to buy the USD later at the end of 3 months.

Other information available are:

1. Current exchange rate (US$/£1):      Spot                            5962

  3-month futures          1.6037

2. Contract size £62,500

3. In 90 days’ time the spot is 1.6213 $/£

4. Assume that the basis is zero at the maturity of the futures contract

Advise PT Gas Co the hedging strategies for the US$ cash flow that is due to pay in three months to Laxamana Co using currency futures. Show all the relevant calculations.