Dayton (U.S.A.) has just sold three gas turbines to Crown (U.K.).Total payment of GBP3 million is due in 3 months.The following quotes are available in the market in the30/360 term.

Spot exchange rate: USD1.762/GBP

3-month forward rate: USD1.754/GBP

3-month pound interest rate: 8% per year

3-month dollar interest rate: 6% per year

3-month call option on U.K. pound: Strike price=USD1.75/GBP: 1.5% premium

3-month put option on U.K. pound: Strike price=USD1.75/GBP: 1% premium

Because the borrowing rate is specific to the transactions, do not use WACC.

1) Calculate the total cash inflows in U.S. dollar for alternative ways that Dayton might hedge its foreign exchange risk at several exchange rates.

a) the unhedged position,

b) the forward hedge, and

c) the option hedge (states which option should be utilized first).

2) At what exchange rate range, the option hedge is better than the forward hedge?Your final answer should start with either "higher than" or "lower than.

Answer rating: 100% (QA)

1 Calculation of total cash inflows in US dollars a Unhedged position The total cash inflows in US d... View the full answer