Trident of U.S.A. has concluded an export sale of telecom equipment to Regency (U.K.) with an...

Trident of U.S.A. has concluded an export sale of telecom equipment to Regency (U.K.) with an amount of £3,000,000 to be received in 90 days. Spot rate: US$ per pound $1.762/£ 90-day forward rate $1.755/£ 3-month U.S. dollar investment rate 6% (annual) 3-month U.S. dollar borrowing rate 8% (annual) 3-month UK investment interest rate 8% (annual) 3-month UK borrowing interest rate 14% (annual) Call options on GBP has a strike price of $1.75/£ with a premium of 1.5% based on the value of receivables. Put options on GBP has a strike price of $1.75/£ with a premium of 1.5% based on the value of receivables.

A. Should the firm buy or sell GBP forward? What is US$ value of the receivable for forward hedge?

B. What is US$ value of the receivable for money market hedge?

Actions: borrow £ , convert to $ at spot rate, invest in $

• (a) borrow £=

• (b) convert to $ at spot rate $1.7620/£

• (c) invest at $ rate for 90 days

C. Should the firm buy call or put on GBP to hedge this transaction? What is the total cost of options ?

D. For options hedge, what the firm should do if the spot rate is $1.655/£ in 90 days? What is US$ value of the receivable ?

E. For options hedge, what the firm should do if the spot rate is $1.785/£ in 90 days? What is US$ value of the receivable ?

Expert Solution

jeff jeffy answered 2 years ago

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