a) Assume the following information: 180‑day U.S. interest rate = 8% 180‑day British interest rate = 9% 180‑day forward rate of British pound = $1.50 Spot rate of British pound = $1.48 Assume that a U.S. exporter will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge. b) As treasurer of a U.S. exporter to Canada, you must decide how to hedge (if at all) future receivables of 250,000 Canadian dollars 90 days from now. Put options are available for a premium of $.03 per unit and an exercise price of $.80 per Canadian dollar (CA$). The forecasted spot rate of the CA$ in 90 days follows: Future Spot Rate Probability (%) $.75 50 .70 50 Given that you hedge your position with options, create a probability distribution for U.S. dollars to be received in 90 days. c) A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. What is the amount of dollars to be received, after deducting payment for the option premium?
- a) Assume the following information:
180‑day U.S. interest rate = 8%
180‑day British interest rate = 9%
180‑day forward rate of British pound = $1.50
Spot rate of British pound = $1.48
Assume that a U.S. exporter will receive 400,000 pounds in 180 days. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each type of hedge.
- b) As treasurer of a U.S. exporter to Canada, you must decide how to hedge (if at all) future receivables of 250,000 Canadian dollars 90 days from now. Put options are available for a premium of $.03 per unit and an exercise price of $.80 per Canadian dollar (CA$). The
forecasted spot rate of the CA$ in 90 days follows:
Future Spot Rate Probability (%)
$.75 50
.70 50
Given that you hedge your position with options, create a probability distribution for U.S. dollars to be received in 90 days.
- c) A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit.
A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit.
You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days.
What is the amount of dollars to be received, after deducting payment for the option premium?
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