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Trident — the same U.S.-based company discussed in this chapter, has concluded a second larger sale...

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.

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