Value of the payable at maturity after the option hedge

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Reference no: EM13941994

A U.S. exporter owes £3,500,000 in six months and is planning to use an option market hedge. The contract sized for options on the British Pound is £100,000. The strike price is X($/£)=1.51 for both calls and puts. The call premium is $0.05/£ while the put premium is $0.03/£. The spot rate next year is expected to be either S1($/£)=1.49 or S1($/£)=1.54 while the current spot rate is S0($/£)=1.51. The interest rate in the U.S. is i$=0.25%. Show how to implement an option market hedge. Show all the cash flows involved and the value of the payable at maturity after the option hedge.

Reference no: EM13941994

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