Question 1 ABC Ltd, a UK company, needs to receive $10 million in 12 months' time. Spot Rate: $1.29/ 12-month forward rate: $1.31/ An OTC call option on dollars is available, exercisable in 12 months' time, with an exercise price of $1.30 for a premium of 0.006 per $. The company is evaluating the following three hedging strategies: 1) The payment is hedged using a forward contract at the rate of $1.31/ 2) The payment is hedged by buying an OTC option from the bank, giving BS International Ltd the option to sell $ at an exercise price of $1.30/ for a premium of 0.006 per $. 3) The payment is not hedged. The future spot exchange rate is expected move to either of the following rates: GBP/USD 1.2312 GBP/USD 1.4263 i. ii. Required: Evaluate the performance of the two alternative hedging methods in 3 months' time given the two future spot rates scenarios expected by the company, and answer the following questions: a) In both scenarios, if ABC enters a Forward contract, how much is the Forward hedge receipt? N b) In both scenarios, if ABC buys an option contract, answer the followings: 2 CONTINUES NEXT PAGE [4 marks] Under which circumstances would the company decide to exercise the option contract? How much is the premium ABC must pay to the option writer? What is the gross and net amount received by ABC in each scenarios? [5 marks] [3 marks] [7 marks] [Total b) 15 marks] c) In both scenarios, if ABC decides to remain unhedged, how much is the receivable? Question 1 ABC Ltd, a UK company, needs to receive $10 million in 12 months' time. Spot Rate: $1.29/ 12-month forward rate: $1.31/ An OTC call option on dollars is available, exercisable in 12 months' time, with an exercise price of $1.30 for a premium of 0.006 per $. The company is evaluating the following three hedging strategies: 1) The payment is hedged using a forward contract at the rate of $1.31/ 2) The payment is hedged by buying an OTC option from the bank, giving BS International Ltd the option to sell $ at an exercise price of $1.30/ for a premium of 0.006 per $. 3) The payment is not hedged. The future spot exchange rate is expected move to either of the following rates: GBP/USD 1.2312 GBP/USD 1.4263 i. ii. Required: Evaluate the performance of the two alternative hedging methods in 3 months' time given the two future spot rates scenarios expected by the company, and answer the following questions: a) In both scenarios, if ABC enters a Forward contract, how much is the Forward hedge receipt? N b) In both scenarios, if ABC buys an option contract, answer the followings: 2 CONTINUES NEXT PAGE [4 marks] Under which circumstances would the company decide to exercise the option contract? How much is the premium ABC must pay to the option writer? What is the gross and net amount received by ABC in each scenarios? [5 marks] [3 marks] [7 marks] [Total b) 15 marks] c) In both scenarios, if ABC decides to remain unhedged, how much is the receivable