Dayton Manufacturing$$s is a U$.$S$.$ based corporation that produces and commercializes turbine generators that are popular among manufacturing firms that have special electricity needs $($large consumption of energy during peak hours of the day$).$ It recently received an order for one of its turbines from a British firm. The order was received in early march, and it was conditioned on the invoice being denominated in GBP so$,$ after making the conversion at the current exchange rate $($$$1\mathrm{.}7640/),$ the value of the turbine generator was fixed at $1,000,000.$ The payment is due three months later, in the early days of June. As a new recruit of the Treasury department of Dayton your boss has asked you to evaluate the position, decide whether or not to hedge it$,$ and in case you recommend to hedge it$,$ prepare a report indicating which is your preferred alternative. She emphatically requested you to present evidence of your analysis and calculations independently of which alternative do you choose.

You gain access to the following additional information:

$-3$ mo$.$ Fwd$.$ Rate:$$1\mathrm{.}7540/(2\mathrm{.}2676\%$ discount on pound$)$;

$-$ Interest rates in London are at $2\mathrm{.}5\%-2\mathrm{.}7\%($investment$-$borrowing$)$; interest rates in the United States are $7\mathrm{.}5\%-8\mathrm{.}7\%($investment$-$borrowing$).$

$-$According to one of your financial consultants, the most likely exchange rate in three months will be $$1\mathrm{.}76/$;

$-$The current premium for a put option on pounds with $3$ months maturity is $0\mathrm{.}0275/$;

You decide there are four alternative exchange$-$rate management strategies available to Dayton. Analyze each alternative $($please report your analysis including description of the actions you take and cash flows$)$:

Remain unhedged

Hedge in the forward market

Hedge in the money market

Hedge in the options market

$5.$ Which alternative would you choose? Argue your decision.

Hint: to compare the forward hedge with the money market hedge, you need to consider how Dayton will utilize the proceeds of the latter during the next $3$ months $($it receives the proceeds right away with the money market strategy, but only at the end with the forward strategy, so you can assume Dayton can invest at a rate of $8\%).$