Lending 8% 2. Assume the following information: 360-day U.S. interest rate - 360-day British interest rate- 360-day forward rate of British pound-$1.50 Spot rate of British pound - $1.48 9% Borrowing 10% 11% A call option exists on British pounds with an exercise price of US$1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. The future spot rate of the pound in 360 days is expected to be $1.52. Assume that the Price Smart Company in the United States will need to pay 400,000 in 360 days. Required: a) Why would the company consider hedging its payables? b) Based on the expectations of the movement of the pound, should the company hedge its payables? c) Showing and explaining all your workings, illustrate whether Price Smart would be better off using a forward hedge, options hedge or a money market hedge. Give reasons for your conclusion.

360-day forward nate of British pound =$1.50 Spot rate of British pound =$1,48 A call option exists on British pounds with an exercise price of USS1.60, a 90-day expiration " date, and a premium of 5.03 per unit. A put option exists on British pounds with an exercise price of 51.60 , a 90-day expiration date, and a premium of $.02 per unit. The future ipot rate of the pound in 360 days is expected to be $1.52. Assume that the Price Smart Company in the United States will need to pay $400,000 in 360 days. Required: a) Why would the company consider hedging its payables? b) Based on the expectations of the movement of the pound, should the company hedge its payables? c) Showing and explaining all your workings, tlustrate whecther Price Smart would be better off using a forward hedge, options hedge or a money market hedge. Give reasons for your conclusion