Management of Transaction exposure $($A$/$R$)$

Maria Gonzalez, CFO$/$treasurer of a US firm Trident, has just concluded a sale to Regency, a British firm, for GBP $($GBP$)1,000,000.$

$-$The sale is made in March for settlement due in three months$$ time in June.

Assumptions$/$Data

$-$ The current spot exchange rate is $$1\mathrm{.}7640/$GBP$1\mathrm{.}00$

$-$ forward rate at the $3$ month is $$1\mathrm{.}7540/$GBP

$-$ UK $3$ month borrowing rate is $10\mathrm{.}0\%$ p$.$a$.$

$-$ UK $3$ month investing rate is $8\mathrm{.}0\%$ p$.$a$.$

$-$ US $3$ month borrowing rate is $8\mathrm{.}0\%$ p$.$a$.$

$-$ US $3$ month investing rate is $6\mathrm{.}0\%$ p$.$a$.$

$-$ June put option in OTC market for GBP$1,000,000$; strike price $$1\mathrm{.}75$; $1\mathrm{.}5\%$ premium

$-$ The terms of an ATM call option with strike price of $$1,75/$GBP would be a $1\mathrm{.}5\%$ premium

$-$ Trident$$s foreign exchange advisory service forecasts future spot rate in $3$ months to be $$1\mathrm{.}7600/$GBP

The following table shows possible USD $($$$)$ amount Trident receives when the actual spot rate $($first row$)$ is realized depending on different alternative decisions. The first collum lists alternative strategies: no hedging, hedging with forward, money market or options.

All the values are $ amount at the time when GBP $1,000,000$ is received.

Draw a graph of this table with ending spot rate on the x$-$axis and $ amount on the y$-$axis.

Submission of a picture of hand drawing is allowed.

Ending spot rate $($$$/$GBP$)$

$1\mathrm{.}711\mathrm{.}731\mathrm{.}751\mathrm{.}77$

Unhedged

Forward

Money Market

Options