1. The following is given for call and put options:

Put Option

Exercise Price= $1.32

Premium= $0.03

Expiration Date= 90-day

Call Option

Exercise Price=$1.28

Premium= $0.02

Expiration Date= 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 $1.25 in 90 days.

i) What type of option should the firm use to hedge its payables?

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

paid for the option premium.

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