Question $6$

ABC Plc is a Great Britain based exporter. It has invoiced a customer in the United States of America for US $$1,058,000$ payable on ${30}^{th}$ June.

The current spot rate US $\frac{\text{\$}}{}$

$1\mathrm{.}7296-1\mathrm{.}7330$

The company wishes to hedge its foreign exchange risk exposure using traded currency options. The sterling $()$ calls with exercise price of US $$\frac{1\mathrm{.}7000}{}$ have premium of $9$ c$.$ The sterling call option contracts are in respect of $25,000.$ Option premium are quoted in cents $\frac{?}{E}.$

Required:

a$.$ Set up the option hedge and calculate the option cost $($Hint: round up the required number of calls to the nearest whole number$),$

b$.$ If on $1^{st}$ June, the US$$/$ spot rate is $1\mathrm{.}8460-1\mathrm{.}8550,$ advise ABCPlc on whether it should allow the options to lapse or exercise them.