Your company will pay 1 million British pounds (GBP) in one year. You want to hedge the
Question:
Your company will pay 1 million British pounds (GBP) in one year. You want to hedge the exchange rate risk. You collected the following data:
Spot exchange rate: 1.4 USD/GBP
Price of a put on the GBP with strike price 1.4 USD/GBP: 0.03 USD
Price of a call on the GBP with strike price 1.4 USD/GBP: 0.04 USD
Size of options contracts: 1 GBP
U.S. interest rate: 1 percent APR
U.K. interest rate: 0.8 percent APR
What is the future value in one year of the cost of the options necessary to hedge the exchange rate risk (number of options x price x (1 + USD interest rate))?
Note: provide your answers with four decimal points and in millions of USD. Please do the calculations in Excel and round up the results to four decimal points only at the end, once the calculations are completed.
Calculus For Scientists And Engineers Early Transcendentals
ISBN: 9780321849212
1st Edition
Authors: William L Briggs, Bernard Gillett, Bill L Briggs, Lyle Cochran