Dayton Manufacturing$$s Transaction Exposure

Scout Finch is the CFO of Dayton, a US$-$based manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a turbine generator to Crown, a British firm, for $1$ million. This single sale is quite large in relation to Dayton$$s present business, so the currency risk of this sale if of particular concern. The sale is made in March with payment due three months later in June. Scout has collected the following financial information:

Spot rate: $1\mathrm{.}74$ $$/$

$3-$month forward rate: $1\mathrm{.}754$ $$/$

UK $3-$month borrowing rate: $10\%$ a year.

UK $3-$month lending rate: $8\%$ a year.

US $3-$month borrowing rate: $8\%$ a year.

US $3-$month lending rate: $6\%$ a year.

June put option for $1$m: Strike $$1\mathrm{.}75,$ premium $1\mathrm{.}5\%$

$*$ Note that the interest rates given are in annual terms but payment is due in three months.

Dayton$$s advisory service forecasts that the spot rate in $3$ months will be $1\mathrm{.}76$ $$/$

a$.$Calculate the dollar value of the position if Dayton wishes to hedge its transaction exposure in the options market. Explain the hedging strategy and calculations. Assume the spot rate at maturity is less than the strike price of the option.

b$.$ Calculate the dollar value of the position if Dayton wishes to hedge its transaction exposure in the options market. Explain the hedging strategy and calculations. Assume the spot price at maturity is $1\mathrm{.}76$$$/.$