[QUESTION 8 STARTS ON THE NEXT PAGE) Module Code: 5FNCEDOTW Page 6 of 9 Question 8 Horizon Plc exports computer components valued at 290 million American dollars (USD) to a British firm (Alpha) on four months credit . The current spot exchange rate is USD1.29 = GBP1.00. Because of recent volatility in the foreign exchange markets, Horizon's directors are worried that a fall in the USD could wipe out their profits on the deal. Three alternative hedging strategies have been suggested: (a) Using a forward market hedge (b) Using a money a market hedge (c) Using an option hedge Apple's treasurer discovers the following information: The four-month forward rate is USD1.30 GBP1.00. Alpha could borrow in USD at 5.00 per cent interest (annual rate) A four-month American put option to sell USD290 million at an exercise rate of USD1.32 = GBP 1.00 could be purchased at a premium of 150,000 on London Over- The-Counter option market Required: Show how each of the above hedging strategies would operate, assuming the following spot rates apply in four months' time: USD1.27 = GBP1.00 (11) USD1.38 = GBP1.00 [Total 25 Marks) . [TOTAL FOR SECTION B: 50 MARKS] [TOTAL FOR ASSESSMENT: 100 MARKS]