Chambers Inc. will receive GBP 2,000,000 in 270 days. The anticipation in the market is GBP will depreciate against USD. To hedge the currency risk emerging from exchange rate movement the treasure analysts at Chambers come up with the following information:

• Spot rate of British pound as of today = 1.61 USD/GBP
• The 270-day forward rate of the British pound, Ft,270, is equal to 1.60 USD/GBP
• The interest rates, for a 270-day holding period, are as follows:
• Deposit rate:
  • 3.5% in the U.K., and
  • 1% in the U.S.
  • Borrowing rate:
    • 4% in U.K., and
    • 1.5% in the U.S.
• A put option on GBP that expires in 270 days has an exercise price of USD 1.59 and a premium of USD 0.02.
• A call option on GBP that expires in 270 days has an exercise price of USD 1.62 and a premium of USD 0.05.
• Chambers Inc. forecasted the future spot rate in 270 days as follows:

Possible Outcomes        Probability
1.56 USD/GBP                  25%
1.60 USD/GBP                  50%
1.66 USD/GBP                  25%

1. 1) Calculate forward hedge, option hedge and money market hedge.
2. 2) Which hedging strategy gives best value for Chambers Inc.?
3. 3) At what future spot rate Chambers will be indifferent between a forward and option hedge.