Assignment 4 Using options for hedging and speculative investments. Problem 1 (Hedging) A U.S exporter expects to receive 1 million in 2 months for her exports to U.K. The current exchange rate is $2.3/. She is worried that the pound might depreciate over the next 2 months and wants protection against its decline but she also wants to benefit from a possible rise in over the next 2 months. Put options and call options on the , with 2-month maturity are available. Required a) What should she do? b) Suppose 2-month put options exercisable at $2.50/ are trading at $.01. What would be her cash revenue, given your answer in part (a), if at the 2-month end the spot exchange rate turns out to be: (i) $2/ (ii) $3/ c) What would be her minimum cash revenue, no matter what the spot rate at the end of 2 months turns out to be? d) What would be the upfront cost (or fee) for undertaking the appropriate options contract? e) What would she do if the expected 1million at the 2-month end are not received and what would be her loss if that happens