Question

An importer, Sarah, needs to protect her one year account payable of £61, 000 by a call option for $.01 per pound premium to avoid pound appreciation against USD. X= $1.50 per £ Option size 31,250 units S0 =$1.52 per £ Exercised at St= $1.54/£ How many option contracts does she need? will she over hedged or under hedged? 1 contracts and over hedged 2 contracts and under hedged Neither over hedged nor under hedged 2 contracts and over hedged

Answer 1

Actual Contract Need = $ 61,000 / 31250 Units

= 1.952

= 2 Contract

She is Overhedge By 1500 Units I.e 62500 Units Hedged - 61000 Actual Hedged needed.

Actual is not full overhedge 2 contract because it just part of the 2nd contract is over hedged if she does not overhedged by 2 contract then he will be marginally underheage by the 1 contract

Gain From Hedging = no Hedging Cost - Hedging Cost

= ($ 1.54 * 61000) - [61000 * (1.52+0.01) - 1500 * 0.01]

= 93940 - [93330 - 15]

= 93940 - 93315

= 625