Question: Suppose that Goodwin Co, a U.S. based MNC, knows that it will receive 200,000 pounds in one year. It is considering a forward put option

Suppose that Goodwin Co, a U.S. based MNC, knows that it will receive 200,000 pounds in one year. It is considering a forward put option to hedge this payable. Currency put options on the pound with expiration dates in one year currently have an exercise price of $1.20 and a premium of $0.03. Goodwin Co. wishes to use its own forecast of what the spot rate might be for the pound one year from now. The company believes there are three possible outcomes for the spot rate for the pound in one year. These three scenanos are shown in the following table: Pound Spot Rate in 1 Year Exercise Options? Scenario Probability $1.10 Net Amount Received Per Unit, Less Premium $1.17 Dollar Amount Received from Hedging 200,000 Pounds $234,000 $234,000 $242,000 Option Premium $0.03 $0.03 $0.03 1 yes 2 25.00% 50.00% 25.00% $1.17 $1.12 yes 3 $1.24 $1.21 mo Given the information in the table, the expected value of dollar cash inflows when hedging these receivables with currency put options for all 200,000 pounds

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