You are a U . S . exporter of soybeans and have just received an order from
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Question:
You are a US exporter of soybeans and have just received an order from the UK You will deliver soybeans today to the buyer in the UK and receive a payment of in one year. You are concerned about the dollar proceeds you will receive from this foreign sale in one year.
Suppose:
Forward exchange rate is $ per pound
Spot exchange rate is $ per pound
US interest rate is
UK interest rate is
Call option with strike price of $ per pound is available with premium of $ per pound.
Put option with strike price of $ per pound is available with premium of $ per pound.
Option market hedge: How can you hedge using options? Should you purchase call or put options on pounds?
d What is the total premium due today?
d What will be the total dollar proceeds if you exercise your options?
d When will you not exercise your options and what will be the total dollar proceeds then?
e Comparing hedging methods: What are the breakeven exchange rates between the different hedging methods?
e When do you prefer which hedging method?
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