Describe how foreign currency options can be used for hedging in the situation so that (a) ImportCo

Question:

Describe how foreign currency options can be used for hedging in the situation so that

(a) ImportCo is guaranteed that its exchange rate will be less than 1.4600, and

(b) ExportCo is guaranteed that its exchange rate will be at least 1.4200 . Use DerivaGem to calculate the cost of setting up the hedge in each case assuming that the exchange rate volatility is $12 \%$, interest rates in the United States are $5 \%$, and interest rates in Britain are $5.7 \%$. Assume that the current exchange rate is the average of the bid and offer in Table 1.1.

image text in transcribed