Part (a) asked candidates to hedge US$ cash flow payments and receipts that a UK-based company was exposed to from its subsidiary based in the USA using various hedging strategies. Generally this part was done well.

Many candidates used forward rates, money markets and currency options to hedge the exposures. Common errors included not netting the cash receipts and payments, hedging more than just US$ cash flows between the two companies, and just undertaking one option hedge, without explaining why the second option contract was ignored.

In many cases the advice was limited to a recommendation but without proper justification, and therefore few marks were gained. Occasionally weaker answers selected the wrong type of option (call instead of put) or the wrong forward rate.