QUESTION $2$

Company Z$,$ based in the United States, is expecting a payment of $500,000$ from a British client in one year. The current spot exchange rate is $$\frac{1\mathrm{.}30}{E}.$ However, Company $Z$ is concerned about the possibility of the pound depreciating against the dollar, which would reduce the value of the payment in USD terms. To hedge against this risk, Company Z decides to use a currency option. It purchases a GBP$/$USD put option with a strike price of $$1\mathrm{.}25.$ The premium for the option is $$0\mathrm{.}03$ per pound. Assume each contract represents $100,000.$ Suppose the U$.$S$.$ interest rate is $5\%$ and the UK interest rate is $4\%.$

a$.$ What are the net dollar proceeds from the British sale using an options market hedge?

$$609,250$

$$630,000$

$$601,670$

$$623,643$