Question $2(20$ marks$)$

g$)$ Under what circumstance would a company seek to hedge its receivables or payables?

$(2$ marks$)$

b$)$ Assume the following information:

$180-$day U$.$S$.$ interest rate $=5\%$

$180-$day British interest rate $=7\%$

$180-$day forward rate of British pound $=$$$1\mathrm{.}30$

Spot rate of British pound $=$$$1\mathrm{.}24$

Assume that Reviera Corp. from the United States will receive $1,400,000$ pounds in $180$ days. Showing and explaining all workings, determine whether it would be better off using a forward hedge or a money market hedge.

$(8$ marks$)$

d$)$ The following is given for call and put options:

$\backslash$table$[[,$Exercise Price,Premium,Expiration Date$],[$Put Option,$$1\mathrm{.}32,$$$0\mathrm{.}03,90-$day$],[,,,],[$Call Option,$$1\mathrm{.}28,$$$0\mathrm{.}02,90-$day$],[,,,]]$

Addison Corporation will need to purchase $500,000$ British pounds in $90$ days and intends to use options contract to hedge its payables. The forecasted spot rate of the pound is $$1\mathrm{.}25$ in $90$ days.

i$)$ What type of option should the firm use to hedge its payables? $(2$ marks$)$

ii$)$ Determine the amount of dollars it will pay for the payables, including the amount

paid for the option premium.

$(3$ marks$)$

e$)$ Write the decision rules $($formulas$)$ to calculate the value of call and put option hedges.

$(5$ marks$)$