An importer in the UK plans to receive a shipment worth $600,000 in 3 months. She has the following alternatives to protect herself from adverse changes in the value of the dollar in terms of the pound.

Alternative 1: Do nothing.

Alternative 2: Enter into a forward contract with a bank. The forward price of the dollar in terms of the pound is .84

Alternative 3: Acquire 6 $100,000 American style options. The following is information regarding the options

Strike Price Premium

Put .835 .004

Call .835 .0065

Also assume the interest rate on a 3-month loan in Cardiff (where the importer is located) is 2% (for the 3 month period).

The importer believes that the dollar could trade as low as .82 and as high as high as .885 in 3 months time.

Given this information, please answer the following questions.

Hint: Do not forget that that the premium is paid up front.

2)Suppose the importer decides on Alternative 2. If, in three months, the dollar trades at the low end, she will pay_____ pounds for her shipment and_______ pounds if the dollar trades on the high end?