Description of two possible hedging approaches

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Reference no: EM13790766

Suppose that the exchange rate is ?1.25 = £1.00.

Options (calls and puts) are available on the London exchange in units of ?10,000 with strike prices of £0.80 = ?1.00.

Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of ?1.25 = £1.00.

For a U.K. firm to hedge a ?100,000 payable using options, there are two possible ways the firm can approach this. Can you please provide a description of each of the two possible hedging approaches?

Reference no: EM13790766

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