A US firm imports £625,000 of goods from a UK firm, and need to pay in six months. The US firm is considering to take the option hedging strategy. Assuming that a 6-month call option on pound is available at the exercise price of $1.20/£ and the call premium of $0.15/£.

Answer the Following Questions:

Show the formula that provides the value (per unit of pound) of this long call option hedge.

Draw a figure that represents (per unit of £) of this long call option hedge. Indicate the essential values of this hedging strategy.

What is the maximum amount of $ that this US firm needs to pay in 6 month even if the pound appreciates more than $1.35/£