Mr. B Rogers, a U.K importer has future payables of ksh.30, 000,000 in 6 Months time. He must decide whether to use options, money market or forward contract to hedge this position. The following information is available. Spot rate 1ksh= 0.0075 One year forward rate 1ksh =0.0078 One year call option: Exercise price 1ksh=0.0076 Premium 0.0003 per1 ksh. One year put option Exercise price 1ksh=0.0074 Premium 0.00025 per 1ksh.

The following are the annual rate of interest in the money

Kenya U.K

Borrowing rate 14% 10%

Deposit rate 7& 5%

Forecast 6- Months 0.0073 0.0078 0.0080

Market rate Probability 0.25 0.45 0.30

Assuming that the importers objective is to minimise the sterling value of ksh payables, which of the hedging instruments would you recommend. Verify your answer by estimating the sterling cost for each type of hedge. Compare the cost of hedging with non-hedging