1.Lalis Bhd. (Lalis), which manufactures medical gloves for the overseas market, will be receiving approximately 800,000 British pounds (GBP) from its customers in about one month from now. Lalis is concerned about the exposures because it believes that there are two possible scenarios:

Scenario 1: The British pound will depreciate to MYR5.4150/GBP over the next month or;Scenario 2: The British pound will appreciate to MYR5.4410/GBP over the next month.

There is a 50 percent chance that Scenario 1 will occur and a 50 percent chance that Scenario 2 will occur. Lalis has noticed that the current spot rate of the British pound is MYR5.4300/GBP, and a one-month option exercise rate is MYR5.4260/GBP, a premium of MYR0.0025, and an expiration date of one month from now.

a)As the current spot rate of the British pound is MYR5.4300-26/GBP, comment whether the exchange rate movements will have a favourable or unfavourable effect on Lalis under each scenario.

b)Determine the changes in the amount of Malaysian ringgit received by Lalis if the receivables to be received in one month are not hedged under each scenario.

c)Should Lalis exercise the option contract under each scenario? Support your answer with the gains (losses) for Lalis if a put option is used to hedge the receivables in one month under each scenario.