What kind of option-put or call is appropriate to hedge with

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Reference no: EM131887501

1. A firm expects a cash inflow of £570,000 in six months. Current exchange rate is $1.55/£. Firm will have to sell pounds in six months. Consider 3 possible spot prices in six months.

-$1.43/£

-$1.52/£

-$1.67/£

A) What kind of option, put or call, is appropriate to hedge with?

B) Which scenario(s) will the firm exercise their option? (Assume an exercise price of $1.55/£)

C) Which one scenario does the firm hopes will happen?

D) In that one scenario, what is the option worth at maturity?

Reference no: EM131887501

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