Question $8$

You are a U$.$S$.$ exporter of soybeans and have just received an order from the U$.$K$.$ You will

deliver soybeans today to the buyer in the U$.$K$.$ and receive a payment of $200,000$ in one year.

You are concerned about the dollar proceeds you will receive from this foreign sale in one year.

Suppose:

Forward exchange rate is $$\frac{1\mathrm{.}40}{}$

Spot exchange rate is $$\frac{1\mathrm{.}35}{?}$ &

U$.$S$.$ interest rate is $3\mathrm{.}00\%$

U$.$K$.$ interest rate is $5\mathrm{.}00\%$

Call option with strike price of $$\frac{1\mathrm{.}40}{?}$ fis available with premium of $$\frac{0\mathrm{.}08}{}$

Put option with strike price of $$\frac{1\mathrm{.}40}{}$ is available with premium of $$\frac{0\mathrm{.}10}{}$

a$)$ Suppose you decide not to do anything. In one year, the spot rate happens to be $$\frac{1\mathrm{.}45}{f}.$

What will be the total dollar proceeds from this sale then? What will be the total dollar

proceeds if the spot rate happens to be $$\frac{1\mathrm{.}30}{}$ in one year? Or $$\frac{1\mathrm{.}32}{}?$ Are you subject

to exchange rate risk if you remain unhedged?

b$)$ How can you guarantee an exact amount of dollar proceeds from this sale using forward

contracts? Should you agree to buy or sell $200,000$ forward in one year? What will be

the total dollar proceeds from this sale with forward hedge? Are you subject to

exchange rate risk in this case?

c$)$ How can you ensure guaranteed dollar proceeds from this sale using money market

hedge? What will be the total dollar proceeds? Are you subject to exchange rate risk

when money market hedge is used?

d$)$ How can you hedge using options? Should you purchase call or put options on pounds?

What is the total premium due today? What will be the total dollar proceeds if you

exercise your options? When will you not exercise your options and what will be the

total dollar proceeds then?

e$)$ What are the break$-$even exchange rates between the different hedging methods? When

do you prefer which hedging method?