Question
Assume that your U.S.-based firm is expecting to receive 100,000 British pounds (GBP) in one year. The GBP spot rate today is $1.12. Your firm
Assume that your U.S.-based firm is expecting to receive 100,000 British pounds (GBP) in one year. The GBP spot rate today is $1.12. Your firm expects (with certainty) that the GBP spot rate will be $1.05 in a year, so it decides to avoid exchange rate risk by hedging this receivable. There are put and call options with one year to expiry that have a strike price of $1.15. The premium on the call option is $0.08 while the premium on the put option is $0.05. The one-year forward rate exhibits a 1% discount. Compute the expected net cash flows received in USD from hedging this receivable using a forward contract versus a currency option.
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