Assume the following information:

360day U.S. interest rate = 4%

360day British interest rate = 5%

360day forward rate of British pound = $2.00/

Spot rate of British pound = $2.02/

Hampshire Co. has account payables of 200,000 British pounds in 360 days. It wishes to hedge this payables position.

A. Set up a forward market hedge for the above account payable. (5 points)

B. Set up a money market hedge for the above account payable. (5 points)

C. Compare the above hedges (in terms of costs). Which hedge would you recommend? (2 points)

(You must show all your work to receive full credit.)