C Corp. is expecting to receive 100,000 British pounds in one year. C Corp expects the...

C Corp. is expecting to receive 100,000 British pounds in one year. C Corp expects the spot rate of the British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53, respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65 percent premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars C Corp. will receive under this strategy? Why?

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE. AS RATES ARE GIVEN IN 2 DECIMALS, I HAVE ROUNDED FORWARD RATE TO 2 DECIMALS. THANK YOU

jeff jeffy answered 1 year ago

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