Assume an American firm (XYZ) is expected to pay 10m GBP () in one years time. If XYZ hedges its foreign exchange exposure using options, what will be its total dollar payment in one years time, including time value of money? Also briefly explain what XYZ needs to do at the end of one year.

Available Information:

• one-year forward rate: US$1.46/
• spot rate: US$1.26/
• call option on pounds with a strike of US$1.42 has a premium of US$0.08
• interest rates: US: 4.5% per annum UK: 7% per annum