A 90-day call option is available on British pounds with an exercise price of $1.44 and a premium of $0.03 per unit. A 90-day put option is available on British pounds with an exercise price of $1.44 and a premium of $0.02 per unit.

A US firm owes its supplier in the UK 500,000 British pounds due in 90 days. The firm purchases options (information about options available is provided above) to cover its payables in British pounds. It will exercise the option in 90 days (if at all). The spot exchange rate in 90 days is $1.45 per pound.

(a)Should the US firm buy call or put option on British pounds to hedge its payable of 500,000 British pounds?

(b)Calculate the break-even price (exchange rate) of the option named in (a). Show your calculations.

(c)Determine the total expected amount of US dollars required to cover the payable of 500,000 British pounds in 90 days, after accounting for the option premium payment. Show your calculations.