Question
Al Marai company is expecting to receive 8 million GBP in one year in Sales proceeds from its British distributor. Al Marai expects the spot
Al Marai company is expecting to receive 8 million GBP in one year in Sales proceeds from its British distributor. Al Marai expects the spot rate of GBP/USD to be 1.30/1.31 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The current spot rate of the GBP/USD is 1.32/1.34. The strike price of put and call options are 1.34/1.35 and 1.33/1.34 respectively. The premium on both options is $0.02. The one-year forward rate shows a 2% premium. What is the best possible hedging strategy and how many U.S. dollars Al Marai will receive under this strategy?
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