Carrycan plc must make a payment of $364 897 in six months’ time. It is currently 1 January. The company is considering the various choices it has in order to hedge its transaction exposure and has collected the following information.
Exchange rates:
$/£ spot rate
1.5617–1.5773
Six-month $/£ forward rate
1.5455–1.5609
Money market rates:
Borrow
Deposit
(%)
US dollars
6
4.5
Sterling
7
5.5
Foreign currency option prices (cents per £ for contract size £12 500):
Exercise price
Call option (June)
Put option (June)
$1.70
3.7
9.6
By making appropriate calculations, decide which of the following hedges is most attractive to Carrycan plc:
(a) forward market (i.e. a forward exchange contract);
(b) cash market;
(c) currency options.
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