In: Finance
Trident — the same U.S.-based company discussed in this chapter, has concluded a second larger sale of telecommunications equipment to Regency (U.K.). Total payment of £2,000,000 is due in 90 days. Given the following exchange rates and interest rates, which of the following statements about option hedge is correct?
Assumptions | Value | |
90-day A/R in pounds | £2,000,000.00 | |
Spot rate, US$ per pound ($/£) | $1.5610 | |
90-day forward rate, US$ per pound ($/£) | $1.5421 | |
3-month U.S. dollar investment rate | 4.000% | |
3-month U.S. dollar borrowing rate | 6.000% | |
3-month UK investment interest rate | 4.500% | |
3-month UK borrowing interest rate | 8.000% | |
Put options on the British pound: Strike rates, US$/pound ($/£) | ||
Strike rate ($/£) | $1.55 | |
Put option premium | 1.500% | |
Strike rate ($/£) | $1.54 | |
Put option premium | 1.000% | |
Strike rate ($/£) | $1.55 | |
Call option premium | 2.500% | |
Trident's WACC | 9.000% | |
Maria Gonzalez's expected spot rate in 90 days, US$ per pound ($/£) | $1.5431 |
Select one:
Sell put options of £2,000,000 with strike of $1.55/£ and receive a (net) minimum of $3,052,116.33 at end of 90 days.
Buy put options of £2,000,000 with strike of $1.55/£ and receive a (net) minimum of $3,048,077.55 at end of 90 days.
Buy put options of £2,000,000 with strike of $1.55/£ and receive a (net) minimum of $3,052,116.33 at end of 90 days.
Buy put options of £2,000,000 with strike of $1.54/£ and receive a (net) minimum of $3,052,116.33 at end of 90 days.
Sell put options of £2,000,000 with strike of $1.54/£ and receive a (net) minimum of $3,048,077.55 at end of 90 days.