a)
i) Forward Contract
Since the payment is due in three months, the three-month forward contract should be used. The company is to buy pounds and the ncurrency dealer is selling. We therefore make use of the selling rate of $1.9339.
The cost = ₤5 million × 1.9339 = $9,669,500
ii) Currency Futures
 Buy or sell futures?
You need to sell dollars in other to buy pounds, so we need to buy futures.
 Which expiry date?
The first futures to mature after the expected payment date (transaction date) are choosen. We therefore select the 5-month expiry date.
 How many contracts?
₤5,000,000 ÷ ₤62,500 = 80 contracts
So we buy 80 contracts at $1.9170/₤
 Predicted futures rate
Current basis = spot price – futures price = 1.9410 – 1.9170 = 0.0240
Unexpired basis on the transaction date = 2/5 × 0.0240 = 0.0096
Lock-in exchange rate = opening futures price + unexpired basis = 1.9170 + 0.0096 = 1.9266
Expected total cost = 5,000,000 × $1.9266 = $9,633,000
iii) Currency options
 Put or Call?
We are required to buy pounds so we must buy a call option on pounds.
 How many contracts?
₤5,000,000 ÷ ₤31,250 = 160 contracts
 Which expiry date?
Same as under futures – we select the 5-month expiry date.
 Which exercise price?
We should choose the cheapest one that includes the exercise price and the premium. Since we are buying pounds we add the premium to the exercise price:

To minimise cost, an exercise price of 1.900 should be selected.

Comment and recommendations
Based on cost, currency futures offer the best choice. However, these calculations ignore margin requirements on futures and problems of basis risk.