You are a U$.$S$.$ exporter of soybeans and have just received an order from the U$.$K$.$ You will deliver soybeans today to the buyer in the U$.$K$.$ and receive a payment of $200,000$ in one year. You are concerned about the dollar proceeds you will receive from this foreign sale in one year.

Suppose:

Forward exchange rate is $$1\mathrm{.}40$ per pound

Spot exchange rate is $$1\mathrm{.}35$ per pound

U$.$S$.$ interest rate is $3\mathrm{.}00\%$

U$.$K$.$ interest rate is $5\mathrm{.}00\%$

Call option with strike price of $$1\mathrm{.}40$ per pound is available with premium of $$0\mathrm{.}08$ per pound.

Put option with strike price of $$1\mathrm{.}40$ per pound is available with premium of $$0\mathrm{.}10$ per pound.

Option market hedge: How can you hedge using options? Should you purchase call or put options on pounds?

d$-2.$ What is the total premium due today?

d$-3.$ What will be the total dollar proceeds if you exercise your options?

d$-4.$ When will you not exercise your options and what will be the total dollar proceeds then?

e$-1.$ Comparing hedging methods: What are the break$-$even exchange rates between the different hedging methods?

e$-2.$ When do you prefer which hedging method?