Hedging (10 points) show your workings

Your firm has payables outstanding from an English supplier of 30 million due in 90 days. (Assume a 30/360 daycount.) There are options and a futures contract available in GBP. Details are in the tables below.

Table 1. Cost of Derivatives
Option Type	Expiration (Days)	Contract Size ()	Contract Price ($/)	Cost of Contract ($/)
Call Option ($/)	90.00	5,000,000.00	1.19000	0.00200
Call Option ($/)	90.00	5,000,000.00	1.18500	0.00300
Call Option ($/)	90.00	5,000,000.00	1.18000	0.00400
Futures Contract ($/)	90.00	10,000,000.00	1.18750	0.00000

Options are in 5 million increments and one futures contract is a commitment to 10 million.

The current exchange rate (i.e., the spot rate) for GBP in USD is $1.20/1.00. A second table provides the distribution of expected spot exchange rates. Given the distribution, should you hedge? If so, what is the most efficient hedge on the payables?

Table 2. Distribution of Expected Spot Rate (E[S0]
t = 0	Change*	t = 90
	+2	1.1950000
	+1	1.1900000
1.1850000	+0	1.1850000
	-1	1.1800000
	-2	1.1750000
	*E[S0] =	0.005000