MUSE Corp., a U.S. firm, is expecting to receive 900,000 British pounds in one year and MUSE Corp. decides to mitigate its exchange rate risk by hedging its receivables. The current spot rate of the pound is quoted at 1.55. The strike price of put and call options are 1.56 and 1.55, respectively. The premium on both options is $.025. The one-year forward rate exhibits a 1% discount from the current spot rate. Assume there are no other transaction costs.

 

1. If the spot rate for the British Pound ends up being 1.50 in one year, what will be the net amount realized by MUSE Corp. on the total transaction if they chose to use an option contract strategy to hedge 75 percent of their planned British Pound receipt, with the balance of the receipt hedged with a forward contract strategy?

2. If the spot rate for the British pound ends up being 1.50 in one year, what will be the net amount realized by MUSE Corp. on the total transaction if they chose to use a forward contract strategy to hedge 50 percent of their exposure to the planned British pound receipt?