Foster Autos is a U.S. multinational that just purchased GBP1,500,000 of goods on account, due in 1 year from a British supplier. The spot exchange rate is $1.715/GBP. Foster wants to hedge the account payable with an OTC call option with a strike price of $1.750/GBP. The option premium is $0.0075/GBP. The interest rate for 1 year in GBP area is 3%, while the interest rate for 1 year in USD area is 5%.

1. Construct a strategy that hedges Cullen from currency exposure using an OTC option contract. You need to include details like, what types of option contract involved, buy or sell, for how long, the strike price, the total contract size and the call premium.

2.If you choose to hedge using the option, considering the following three scenarios after 1 year: exchange rate turns out to be $1.50/GBP, $1.75/GBP, $2.00/GBP, how much is your future dollar cost of AP using option hedge?

3. If you choose not to hedge at all, considering the following three scenarios after 1 year: exchange rate turns out to be $1.50/GBP, $1.75/GBP, $2.00/GBP, how much is your future dollar cost of AP without option hedge?

4. How many more (less) US dollar would you pay when using option hedge than no hedge at all? When do you think the hedge would be beneficial?