Exchange-traded foreign currency option prices for dollar/sterling contracts are shown below:

Sterling (£12,500) contracts Calls Puts Exercise price ($) December September December September 1.90 5.55 7.95 0.42 1.95 1.95 2.75 3.85 4.15 3.80 2.00 0.25 1.00 9.40 –

2.05 – 0.20 – –

Option prices are in cents per £. The current spot exchange rate is $1.9405–$1.9425/£.

Required Assume that you work for a US company that has exported goods to the United Kingdom and is due to receive a payment of £1,625,000 in three months’ time. It is now the end of June.

Calculate and explain whether your company should hedge its sterling exposure on the foreign currency option market if the company’s treasurer believes the spot rate in three months’ time will be:

(a) $1.8950–1.8970/£

(b) $2.0240–2.0260/£

(ACCA)