# problem 2 on july 1 an american auto dealer enters into a contract to purchase 20 br 4527152

Problem 2: On July 1, an American auto dealer enters into a contract to purchase 20 British sports cars with payment to be made on November 1. Each car will cost 35,000 pounds. The dealer decides to conduct a long hedge with currency futures based on the following quotes on July 1:Current exchange rate: \$1.6190/Â£December pound futures contract price: \$1.5780/Â£One pound futures contract:Â£62,500Suppose that, on November 1, the spot rate is \$1.7420/Â£ and the December pound futures contract price is \$1.7375/Â£.Questions:1. If the dealer closes his position on November 1, will he make a profit or loss? How much is it?2. How much does the dealer effectively pay for the 20 cars?Problem 3: Fresno Corporation will need Â£343,800 in 180 days to pay for shipments of British components to its US-based assembly plant. The firm decides to take a hedge with a call option. Financial market data are as follows:Spot rate of pounding sterling:\$1.50/Â£Premium on a 180-day call option at \$1.6720/Â£:\$0.02/Â£Standard value per contract:Â£31,250Questions:1. How many contracts does Fresno have to purchase?2. What is the total premium it has to pay?3. If the spot rate at maturity is \$1.6560/Â£, should Fresno exercise the option? Why or why not?4. Suppose the spot rate at maturity is \$1.6900/Â£ and Fresno exercises its option. What is the total amount that the firm pays for the Â£343,800? How much would it pay if it did not buy a call option?