Trident-the U.S.-based company discussed in this chapter-has concluded another large sale of telecommunications equipment to Regency (U.K.). Total payment of £3,000,000 is due in 90 days. Maria Gonzalez has also learned that Trident will only be able to borrow in the United Kingdom at 14% per annum (due to credit concerns of the British banks). Given the following exchange rates and interest rates, what transaction exposure hedge is now in Trident's best interest?

Assumptions____________________________________Value

90-day A/R in pounds......................................£3,000,000.00

Spot rate, US$ per pound ($/£)...................................$1.7620

90-day forward rate, US$ per pound ($/£).....................$1.7550

3-month U.S. dollar investment rate..............................6.000%

3-month U.S. dollar borrowing rate..............................8.000%

3-month U.K. investment interest rate...........................8.000%

3-month U.K. borrowing interest rate..........................14.000%

Put options on the British pound: Strike rates, US$/pound ($/£)

Strike rate ($/£)........................................................$1.75

Put option premium................................................1.500%

Strike rate ($/£)........................................................$1.71

Put option premium.................................................1.000%

Trident's WACC..................................................12.000%

Maria Gonzalez's expected spot rate in 90-day,

US$ per pound ($/£)...............................................$1.7850