Question
5. Chambers Inc has a GBP 10,000,000 payable in in 180 days. It considers using (1) a forward hedge, (2) a money market hedge,
5. Chambers Inc has a GBP 10,000,000 payable in in 180 days. It considers using (1) a forward hedge, (2) a money market hedge, (3) an option hedge, (4) a collar, or (5) no hedge. Chambers develops the following information: S = 1.61 USD/GBP Interest USD = 5% -5.25% Interest GBP = 6% -6.5% FL,180-day 1.60 USD/GBP Put (Xp 1.565 USD/GBP; pp = USD .01) Call (X=1.58 USD/GBP; pc = USD .04) Distribution for St+90 S+180 (USD/GBP) 1.56 Probability .30 .60 1.59 1.63 .10 A. Carefully describe each strategy and cash flows (if possible, calculate sure amounts and expected values). Which hedging strategy would you recommend to Chambers Inc? Do preferences matter for your strategy recommendation? Justify your answer. B. Describe the exposure of Chambers. Given the information above, formulate a range for transaction exposure. C. Suppose a consultant tells you the distribution of monthly changes in the USD/GBP exchange rate is st~N(0,.03). Calculate the VaR(mean, 97.5%).
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