Question 4 Unipart Group is a British multinational corporation based in England , United Kingdom . It imports some materials from U.S. companies and needs to pay its suppliers 10 , 000 , 000 U . S. dollars ( USD ) in 60 days' time . Unipart can hedge its currency risk using the two following methods :` 1 . [ Unipart can negotiate a basic currency call option on USD in which the exercise price is 1 .80 British pounds ( GBP ) and the premium is 0 . 03 GBP per unit . 2 . ` Alternatively , Unipart can negotiate a conditional currency call option with a commercial bank ; this option has an exercise price of 1 . 80 GBP and a trigger price of 1. 75 GBP . If the USD's value rise above the exercise price by the expiration date , then* Unipart will exercise the option and thereby pay 1. 80 GBP per unit ; furthermore , it will not have to pay a premium for the option . If the USD's value is between the exercise price of 1 . 80 GBP and the trigger 1 . 75 GBP , then the option will not be exercised , and Unipart will not have to pay the premium . If the USD's value falls below the 1. 75 GBP trigger , then Unipart must pay a premium of 0 . 04 GBP per unit . Note that this premium is higher than the premium that would have been paid for a basic currency call option . ( 2 ) Plot a contingency graph for Unipart where the vertical axis shows the net cost of settling the USD payable under the method 1 , and the horizontal axis shows the USD's exchange rate in 60 days' time . Ensure you depict the vertical axis values for the following USD's exchange rates : 1 . 70 GBP , 1. 75 GBP , 1.80 GBP and 1.85 GBP . ( 6 marks ) ( b ) Plot a contingency graph for Unipart where the vertical axis shows the net cost of settling the USD payable under the method 2 , and the horizontal axis shows the USD's exchange rate in 60 days' time . Ensure you depict the vertical axis values for the following USD's exchange rates : 1 . 70 GBP , 1.75 GBP , 1.80 GBP and 1 . 85 GBP . ( 8 marks ) ( C ) The choice of a basic versus a conditional currency call option depends on expectations about the USD's exchange rate . Suppose Unipart believes the USD'S exchange rate in 60 days' time are distributed as follow :` Exchange rate of USD 1. 70 GBP 1.75 GBP\\ 1.80 GB 1.85 GBP Probability 15%/0 35% 35% 15% Which hedging method would you recommend for Unipart ? Why ? ( 8 marks ) (TOTAL : 22 marks)