Dell Corp. sold a computer system to a customer in the UK and billed 10 million receivable in 6 months. Dell would like to control for the exchange rate risk. The current spot exchange rate is $1.30/ and the 6-month forward exchange rate is $1.27/ at the moment. Dell can buy a 6-month put option on 10 million with a strike price of $1.32/ for a premium of $0.02 per pound. It can also buy a 6-month call option on 10 million with a strike price of $1.29/ for a premium of $0.15 per pound. Currently, 6-month interest rate is 6.1% per annum in the U.K. and 5.0% per annum in the U.S.

a) Compute the guaranteed dollar proceeds from the sale if Dell decides to hedge using a forward contract.

b) If Dell decides to hedge using money market instruments, what action does Dell need to take? What would be the guaranteed dollar proceeds from the sale in this case?

c) If Dell decides to hedge using options on pounds, what option (put or call) will Dell use? And what would be the expected dollar proceeds from the aircraft sale? Assume that Dell regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate.

d) Based on the available information and your calculations above, what is your recommendation to Dell for a best strategy (forward hedge vs money market hedge vs options hedge)? Why?

e) Other things being equal, at what forward rate would Dell be indifferent between the forward and money market hedge?