Question: PLEASE ANSWER WITH CALCULATIONS AND THEORY X co has a foreign-currency denominated payable, it can hedge by buying the foreign currency payable forward. The company

PLEASE ANSWER WITH CALCULATIONS AND THEORY

X co has a foreign-currency denominated payable, it can hedge by buying the foreign currency payable forward. The company can expect to eliminate the exposure without incurring costs as long as the forward exchange rate is an unbiased predictor of the future spot rate. X co exported an Airbus to a UK company, and was billed the sum of 12,000,000 payable in three months. Currently the spot rate is $1.40/ and the three-month forward rate is $1.36/.The three-month money market interest rate is 12% per annum in US and 8% per annum in UK. So the management of X co decided to manage this transaction exposure and use the money market hedge to deal with this pound account payable.

1. Explain how X co can eliminate the exchange rate exposure and compute the dollar cost of meeting the pound obligation.

2. Conduct a cash flow analysis of the money market hedge.

3. Compare and contrast the cash flow at maturity and the net dollar proceeds if instead the options market hedge is used by X co. You may assume a put option of 12,000,000 with an exercise price of $1.36/ with a three-month expiration and an option premium of $ 0.05 per .

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