Suppose you need to pay V = 50,000 GBP in a year from now. Spot rate of

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Question:

Suppose you need to pay V = 50,000 GBP in a year from now. Spot rate of GBP is 1.3. You do not have enough USD to purchase 50,000 GBP right now. Depending on the state of economy, the GBP spot rate in a year from nom may be: Favorable state: 1.2; Neutral state: 1.3; Unfavorable state: 1.4

a) Would you hedge the risk with a call or put option?

b) Calculate the benefit of hedging for each of the three states. Assume the strike price of 1.15 and option premium = 0.01 USD per 1 GBP option. %3!