How pfimerc will hedge this exposure using a forward hedge

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Reference no: EM132761834

On Friday, October 1, 2010, Pfimerc, an exporter of pharmaceutical products from the United States to the United Kingdom, knew it had an account receivable of £500,000 due on Friday, March 19, 2011. The following data were available:

Spot rate (U.S. cents per British pound): 158.35
170-day forward rate (U.S. cents per British pound): 158.05
U.S. dollar 170-day interest rate: 0.20% p.a.
British pound 170-day interest rate: 0.40% p.a.
Option data for March contracts in ¢/£:

The time period between October 1, 2010 and March 19, 2011 is 170 days. Assume a strike price of 159 ¢/£.

Problem a) Illustrate how Pfimerc will hedge this exposure using a forward hedge. Draw a diagram to support your answer.

Problem b) Illustrate how Pfimerc will hedge this exposure using an option contract.

Reference no: EM132761834

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