Question

Alfred owes GBP 1M in one year, but all of his assets are in USD. He...

Alfred owes GBP 1M in one year, but all of his assets are in USD. He wishes to use options to reduce his exposure to exchange rates. He has the following options available to him for purchase. You may ignore option premia for the purposes of this question, and assume he can choose an option with whatever quantity of the underlying asset he wishes – if he chooses an option with USD as the underlying, he can choose any quantity of USD

Option

Strike Price

Maturity

Underlying Asset

Long Call

USD 1.25 per GBP

1 year

GBP

Long Put

USD 1.15 per GBP

1 year

USD

Long Put

USD 1.20 per GBP

1 year

GBP

Long Call

USD 1.10 per GBP

1 year

USD

4A. Which one of these options should he choose?

4B. What should he set the underlying asset to?

4C. Will he exercise the option if the spot rate is USD 1.19 per GBP in one year?

4D. If the spot rate is USD 1.19 per GBP in one year, what exchange rate will he actually be buying his GBP at?

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