Suppose you need to pay $V=50,000GBP$ in a year from now. Spot rate of GBP is $1\mathrm{.}3.$ You do not have enough USD to purchase $50,000$ GBP right now. Depending on the state of economy, the GBP spot rate in a year from nom may be:

Favorable state: $1\mathrm{.}2$ ; Neutral state: $1\mathrm{.}3$ ; Unfavorable state: $1\mathrm{.}4$

a$)$ Would you hedge the risk with a call or put option?

We need to buy insurance against appreciation of GBP$.$ Thus, we should buy a call option.

b$)$ Calculate the benefit of hedging for each of the three states. Assume the strike price of $1\mathrm{.}15$ and option premium $=0\mathrm{.}01$ USD per $1$ GBP option.