Coca-Cola will receive totaling £2.5 million next month from British customer. It can buy pound put options with a strike price of $1.65 at a premium of 2.0 cents per pound. The spot price of the pound is currently $1.68, and the pound is expected to trade in the range of $1.62 to $1.70. Coca-Cola also can take a short position in the pound futures contract with a futures price of $1.64.
a. How many options and futures contracts will Coca-Cola need to protect its payment? Each contract size is £31,250 for options and £62,500 for futures and calculate the breakeven point (5 points)
b. Diagram Coca-Cola's profit and loss associated with the put option position and futures position within its range of expected exchange rates. Ignore transaction costs and margins.( 5 points)
c. Calculate what Coca-Cola would gain or lose on the option within the range of expected future exchange rates at three points: $1.63, $1.66 & $1.70.( 15 points)