The current spot exchange rate is 1.27 $/ BP. Your customer is an importer from Britain. He will have to pay 10 million BP in three months. The following currency options (prices are in Dollars for BP delivery) are available: Which option will you recommend for hedging the BP liability (Put or Call)? Explain the customer the difference between the two strikes by comparing them to an unhedged position. In your explanation use as an example exchange rates of 1.35$/BP and 1.24$/BP in three months. Show (calculate) the payable total cost under the two exchange scenarios and three hedging choices (1: unhedged, 2: 1.25 strike hedge and 3: 1.30 hedge); you can disregard the time value of money of the premium payment.
The current spot exchange rate is 1.27 $/ BP. Your customer is an importer from Britain. He will have to pay 10 million BP in three months. The following currency options (prices are in Dollars for BP delivery) are available: Which option will you recommend for hedging the BP liability (Put or Call)? Explain the customer the difference between the two strikes by comparing them to an unhedged position. In your explanation use as an example exchange rates of 1.35$/BP and 1.24$/BP in three months. Show (calculate) the payable total cost under the two exchange scenarios and three hedging choices (1: unhedged, 2: 1.25 strike hedge and 3: 1.30 hedge); you can disregard the
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