Robert Murphy, a U$.$S$.$ based entrepreneur who has recently bought Celtic Computers

will be receiving about $10,000$ British pounds about $1$ month from now as payment for

exports produced and sent by his firm. Robert believes there are two possible scenarios in

relation to his exposure. First, is that the pound will depreciate by $3$ percent over the next

month. Second, is that the pound will appreciate by $2$ percent over the next month. There

is a $70$ percent chance that the first scenario will occur and a $30$ percent chance the

second scenario will occur. The prevailing spot rate of the pound is $$1\mathrm{.}65,$ and the $1-$

month forward rate is about $$1\mathrm{.}645.$ Robert can purchase a put option over the counter

from a securities firm that has a strike price of $$1\mathrm{.}645,$ a premium of $$0\mathrm{.}025,$ and an

expiration date of $1$ month from now.

i$.$ Determine the amount of dollars received by Celtic Computers if the receivables

to be received in $1$ month are not hedged under each of the two exchange rate

scenarios.

ii$.$ Determine the amount of dollars received by Celtic Computers if a put option is

used to hedge receivables in $1$ month under each of the two exchange rate

scenarios.

iii. Determine the amount of dollars received by Celtic Computers if a forward hedge

is used to hedge receivables in $1$ month under each of the two exchange rate

scenarios.

iv$.$ Summarize the results of dollars received based on an unhedged strategy, a put

option strategy, and a forward hedge strategy. Select the strategy that you prefer

based on the information provided.