Question

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: 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.

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.

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 $1.55/£ 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 $3,052,116.33 at end of 90 days.

Answer 1

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