On Friday, October 1, 2010, Pfimerc, an exporter of pharmaceutical products from the United States to the United Kingdom, knew it had an account receivable of 500,000 due on Friday, March 19, 2011. The following data were available: Spot rate (U.S. cents per British pound): 158.35 170-day forward rate (U.S. cents per British pound): 158.05 U.S. dollar 170-day interest rate: 0.20% p.a. British pound 170-day interest rate: 0.40% p.a. Option data for March contracts in /: The time period between October 1, 2010 and March 19, 2011 is 170 days. Assume a strike price of 159 /. a) Illustrate how Pfimerc will hedge this exposure using a forward hedge. Draw a diagram to support your answer. b) Illustrate how Pfimerc will hedge this exposure using an option contract. c) Which of the hedging strategies in a) and b) should Pfimerc choose? Explain.

All values in the table are in: /

Strike Call Prices Put Prices 158--------- 5.00---------------- 4.81 159--------- 4.52 ----------------5.33 160 ---------4.08---------------- 5.89