A US based IT firm required GBP 100000 in 180 days. The company feels that exchange rates are expected to fluctuate in the next 6 months. Their near accurate estimate based on a good quality research were as below: Current Rate of GBP = USD 1.50 180 days forward rate for GBP = USD 1.48 Call premium USD 0.02 (strike price of USD 1.50 for 180 days) Interest Rates in London for deposits – 4.5% and for loans – 5.1% Interest Rates in New York for deposits – 4.5% and for loans – 5.1% A fair estimate of exchange rate after 180 days is expected to be USD 1.44 with a probability of 20%, USD 1.46 with a probability of 60% and USD 1.53 with a probability of 20%. Advise the company on a good hedging strategy. Make suitable assumptions if required and state the same.
A US based IT firm required GBP 100000 in 180 days. The company feels that exchange rates are expected to fluctuate in the next 6 months. Their near accurate estimate based on a good quality research were as below:
Current Rate of GBP = USD 1.50
180 days forward rate for GBP = USD 1.48
Call premium USD 0.02 (strike price of USD 1.50 for 180 days)
Interest Rates in London for deposits – 4.5% and for loans – 5.1%
Interest Rates in New York for deposits – 4.5% and for loans – 5.1%
A fair estimate of exchange rate after 180 days is expected to be USD 1.44 with a probability of 20%, USD 1.46 with a probability of 60% and USD 1.53 with a probability of 20%.
Advise the company on a good hedging strategy. Make suitable assumptions if required and state the same.
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