Assume it is March 16, 2020. British Pounds 3-month forward rate is US$1.2550 per . The premium of 3-month Pound call options (with a strike price of US$1.2550/) is US$0.015/, and the premium of 3-month Pound put options (with a strike price of US$1.2550/) is US$0.01/.

(a) A US ImportCo must pay 78,500 on June 16, 2020 for goods purchased from Britain.

(i) Discuss how foreign currency forwards and currency options can be used for hedging. Please draw the graphs for the unhedged and hedged costs of payment by using currency forwards and currency options.

(ii) What would be the profit or loss on the forwards positions and the hedged costs of payment for the firm if the expected future spot rate in three months is US$1.3000/? What would be the effective exchange rate the US ImportCo is guaranteed that its exchange rate will be fixed at for the pounds it will pay.

(iii) What would be the profit or loss on the options positions and the hedged costs of payment for the firm if the expected future spot rate in three months is US$1.3000/. What would be the effective maximum exchange rate the US ImportCo is guaranteed that its exchange rate will be fixed at for the pounds it will pay.

(b) A US ExportCo will receive 78,500 on June 16, 2020 from a customer in Britain.

(i) Discuss how foreign currency forwards and currency options can be used for hedging. Please draw the graphs for the unhedged and hedged value of asset by using currency forwards and currency options.

(ii) What would be the profit or loss on the forwards positions and the hedged value of asset for the firm if the expected future spot rate in three months is US$1.2000/? What would be the effective exchange rate the US ExportCo is guaranteed that its exchange rate will be fixed at for the pounds it will receive.

(iii) What would be the profit or loss on the options positions and the hedged value of asset for the firm if the expected future spot rate in three months is US$1.2000/. What would be the effective minimum exchange rate the US ExportCo is guaranteed that its exchange rate will be fixed at for the pounds it will receive.

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