Hedging (II) Martha Exporter, Miami Baking Ltd, exports her delicious Martha’s Brownies to the United Kingdom and has accounts receivables in pounds sterling of £100,000 in 90 days. Basic data: US interest rate at which Martha can borrow dollars is 10 percent p.a. UK interest rate at which Martha can borrow pounds is 8 percent p.a. Spot price of pound is \($1.763,\) bid. Spot price of pound is \($1.769,\) ask. Forward bid price of pound is \($1.78\) for 90-day delivery. Premium on £ put option at \($1.78\) (at-the-money) strike price is \($0.0028\) per £. 

a What are the various contractual hedges that Martha might purchase to hedge her pound exchange exposure?

Now suppose that Martha decides to invoice British Baking Imports in US dollars to shift the exchange rate exposure to the importer. She thus invoices \($178,000\) dollars deliverable in 90 days. British Baking is assumed to face the same market conditions as Martha’s Brownies, namely: US interest rate at which British Baking can lend dollars is 10 percent p.a. UK interest rate at which British Baking can borrow pounds is 8 percent p.a. Spot ask price of the dollar is £0.56527 per dollar. Forward ask price of the dollar is £0.5618 per dollar for 90-day delivery. A £0.5618 at-the-money call option to buy dollars costs £0.0028 per dollar. 

b What are the various contractual hedges that British Baking might purchase to hedge their dollar exchange exposure?