Question
In August, a U. S. company places an order for English breakfast tea with a British supplier, under which it would have to pay the
In August, a U. S. company places an order for English breakfast tea with a British supplier, under which it would have to pay the supplier GBP 625,000 in 3 months and would like to hedge the resulting exchange rate risk. It is considering the following alternative methods of hedging. I. Buy a forward contract on GBP 625,000 with a delivery date in 3 months. II. Buy a put currency option on GBP 625,000 with an exercise price of USD 1.50 per GBP and an expiration date in 3 months. III. Buy 10 British pound futures contracts traded on the CME with a size of 62,500 GBP and delivery in 3 months. The U. S. company should:
a. Choose I or III and reject II. b. Choose I, II or III. c. Choose II or III and reject I. d. Choose I or II and reject III. e. Reject I, II and III.
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