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Assume an Australian firm (ABC) is expected to pay 20m GBP () in one year. If ABC hedges its foreign exchange exposure using options, what
Assume an Australian firm (ABC) is expected to pay 20m GBP () in one year. If ABC hedges its foreign exchange exposure using options, what will be its total dollar payment in one year's time, including time value of money? Also briefly explain what ABC needs to do at the end of one year.
Available Information:
one-year forward rate: AUD$1.42/
spot rate: AUD$1.24/
call option on pounds with a strike of AUD$1.38 has a premium of AUD$0.07
interest rates:
AUS: 5.5% per annum UK: 8% per annum
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