Question

13) 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:

a.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.

b.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.

c.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.

d.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.

e.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.

Answer 1

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