Consider a US firm sells a gas turbine generator to a British firm; in March 201x for British pound BP 1,000,000. Payment is due three months later in June 201x. The firms cost of capital is 12%. The following quotes are current in the market:

1. spot rate: $1.764 per British pound

2. 3-month forward rate: $1.754 per British pound

3. 3-month interest rate for borrowing in U.K.: 2.5% Per quarter

4. UK 3-month investment rate: 2.0% /quarter

5. US 3-month borrowing rate: 2.0% /quarter

6. US 3-month investment rate: 1.5% per quarter

7. June put option in the over the counter market for British pound 1,000,000; strike price $1.71 (out-of-the money): 1% premium

8. June put option on the Philadelphia Stock Exchange:

British pound BP 31,250 per contract at strike price of $1.75 cost

2.5 cents per pound premium, and brokerage cost $50 per contract

9. the firms foreign exchange advisory service forecasts that the spot

rate in three months will be $1.76 per pound.

Show all your calculations of cost of the following alternatives:

(i) Unhedged Position; (ii) Money Market Hedge; (iii)Forward market hedge; and (iv) Options Hedge;

(Show your work. This means that No work is No credits)