In January, ABC Co. in U.S. signed a contract to buy a factory in U.K for 2,500,000 payable 3 months later in April. Since the contract is in pound rather than dollar, ABC Co. is considering hedging alternatives to reduce the risk of exchange rate from the purchase. Given the information below:

Spot rate = $1.40/

3 month forward rate = $1.38/

ABC's cost of capital is 11% p.a

UK 3-month borrowing rate is 2.5%

UK 3-month lending rate is 1.8%

U.S. 3-month borrowing rate is 2%

U.S. 3-month lending rate is 1.5%

April call options for 625,000; strike price $1.42, premium price is 1.5%

ABC Co. forecast for 3-month spot rate is $1.43/.

The highest acceptable purchase price for this project, is $3,625,000 or $1.45/

Show the calculation for hedging in money market, forward market, and option market.

Which hedging method will you adopt? Explain and summarize the outcomes.