Terry McDermott and Aidan. Aidan—the Irelandbased 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. Terry McDermott has also learned that Aidan will only be able to borrow in the United Kingdom at 14% per annum (due to credit concerns of British banks). Given the following exchange rates and interest rates, what transaction exposure hedge is now in Aidan’s best interest?

Assumption Value 90-day A/R in pounds £3,000,000.00 Spot rate, euro per pound (€/£) €1.0920 90-day forward rate, euro per pound (€/£) €1.0750 3-month euro investment rate 6.000%

3-month euro borrowing rate 8.000%

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

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

Assumption Value Aidan’s WACC 12.000%
Expected spot rate in 90 days (€/£) €1.1000 Put options on the British pound:
Strike rate (€/£) Premium €1.07 1.500%
€1.04 1.000%