Jim Logan, owner of the Sports Exports Company, will be receiving about 10,000 British pounds about one month from now as payment for exports produced and sent by his rm. Jim is concerned about his exposure because he believes that there are two possible scenar-ios: (1) the pound will depreciate by 3 percent over the next month or (2) the pound will appreciate by 2 per- cent over the next month. There is a 70 percent chance that Scenario 1 will occur. There is a 30 percent chance that Scenario 2 will occur.

Jim notices that the prevailing spot rate of the pound is $1.65, and the one-month forward rate is about $1.645. Jim can purchase a put option over the counter from a securities rm that has an exercise (strike) price of $1.645, a premium of $.025, and an expiration date of one month from now.

1. Determine the amount of dollars received by the Sports Exports Company if the receivables to be re- ceived in one month are not hedged under each of the two exchange rate scenarios.

2. Determine the amount of dollars received by the Sports Exports Company if a put option is used to hedge receivables in one month under each of the two exchange rate scenarios.

3. Determine the amount of dollars received by the Sports Exports Company if a forward hedge is used to hedge receivables in one month under each of the two exchange rate scenarios.

4. Summarize the results of dollars received based on an unhedged strategy, a put option strategy, and a forward hedge strategy. Select the strategy that you prefer based on the information provided.

Answer rating: 100% (QA)

Unhedged Scenario a If the pound depreciates by 3 the exchange rate would be 165 1 003 160 Amount in ... View the full answer