A U.K Expoter has future Receivables of ksh.30, 000,000 in 6 Months time. He must decide whether to use options, money market or forward contract to hedge this position. The following information is available.

Spot rate 1ksh= 0.0075

6 Months forward rate 1ksh =0.0078

6 Months call option:

Exercise price 1ksh=0.0076

Premium 0.0003 per1 ksh.

6 Months put option

Exercise price 1ksh=0.0074

Premium 0.00025 per 1ksh.

The following are the annual rate of interest in the money market:- Kenya U.K % % Borrowing rate 14 10 Deposit rate 7 5

Forecast 6- Months 0.0073 0.0078 0.0080

Market rate Probability 0.25 0.45 0.30

Required Assuming that the exporters objective is to maximize the sterling value of ksh receivables, which of the hedging instruments would you recommend. Verify your answer by estimating the sterling cost for each type of hedge. Compare the cost of hedging with non-hedging