There is 50 million receivable due in 3 months from a customer who has purchased machinery...

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There is £50 million receivable due in 3 months from a customer who has purchased machinery from IC Inc. The current spot exchange rate $1.8870/£. The company is considering hedging this using a currency option priced at the 3 months forward rate of $1.8830/£. The three months interest rate in U.S. dollars is 2.73 per cent per year and for British pounds it is 4.875 per cent per year. The volatility of the exchange rate pair is 15 per cent. What will be the price of the currency option (using the binomial option pricing model with one-month steps)? Take three months to be a quarter of a year. What is the break-even exchange rate for IC Inc if it uses the currency option to hedge its exposure? Explain your reasoning. There is £50 million receivable due in 3 months from a customer who has purchased machinery from IC Inc. The current spot exchange rate $1.8870/£. The company is considering hedging this using a currency option priced at the 3 months forward rate of $1.8830/£. The three months interest rate in U.S. dollars is 2.73 per cent per year and for British pounds it is 4.875 per cent per year. The volatility of the exchange rate pair is 15 per cent. What will be the price of the currency option (using the binomial option pricing model with one-month steps)? Take three months to be a quarter of a year. What is the break-even exchange rate for IC Inc if it uses the currency option to hedge its exposure? Explain your reasoning.

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What will be the price of the currency option using the binomial option pricing model with onemonth steps Take three months to be a quarter of a year To calculate the price of the currency option usin... View the full answer