4. A U.S. firm expects a cash outflow (payable) of 1,000,000 in six months. The current exchange rate is $1.225/. The U.S firm will have to buy pounds in six months (to fulfill the payable). Consider 3 possible spot prices in six months. 1. $1.32/ 2. $1.22/E 3. $1.16/ What kind of option, put or call, is appropriate to hedge with? In which scenario(s) above (numbered 1, 2, and 3) will the firm exercise their option? (Assume an exercise price of $1.23/f) I Which one scenario above (numbered 1, 2, and 3) does the firm hope will happen? In that one scenario you just identified, what is the total amount of the firm's GROSS payable? GROSS payable implies you should include both the costs of the payable as well as the hedging costs of buying the option. (Assume an option exercise price of $1.23/ and option premium of $.024/)

4. A U.S. firm expects a cash outflow (payable) of 1,000,000 in six months. The current exchange rate is $1.225/E. The U.S firm will have to buy pounds in six months (to fulfill the payable). Consider 3 possible spot prices in six months. 1. $1.32/E 2. $1.22/ 3. $1.16/ - What kind of option, put or call, is appropriate to hedge with? - In which scenario(s) above (numbered 1,2, and 3) will the firm exercise their option? (Assume an exercise price of $1.23/E ) - Which one scenario above (numbered 1,2, and 3) does the firm hope will happen? - In that one scenario you just identified, what is the total amount of the firm's GROSS payable? GROSS payable implies you should include both the costs of the payable as well as the hedging costs of buying the option. (Assume an option exercise price of $1.23/E and option premium of $.024/f )