Interco

The German company is bidding on a contract which they cannot be certain of winning. Thus, the need to execute a currency transaction is similarly uncertain, and using a forward or futures as a hedge is inappropriate, because it would force them perform even if they do not win the contract.

Using a sterling put option as a hedge for this transaction makes the most sense. For a premium of:

12 million STG x .0161 = 193,200 STG,

They can assure themselves that adverse movements in the pound sterling exchange rate will not diminish the profitability of the project (and hence the feasibility of their bid), while at the same time allowing the potential for gains from sterling appreciation.

The German company is bidding on a contract which they cannot be certain of winning. Thus, the need to execute a currency transaction is similarly uncertain, and using a forward or futures as a hedge is inappropriate, because it would force them perform even if they do not win the contract.

Using a sterling put option as a hedge for this transaction makes the most sense. For a premium of:

12 million STG x .0161 = 193,200 STG,

They can assure themselves that adverse movements in the pound sterling exchange rate will not diminish the profitability