STEP: $2$ of $3$

Suppose that Mullen Co$,$ a U$.$S$.$ based MNC$,$ knows that it will need $100,000$ pounds in one year in order to purchase supplies. It is considering a forward call option to hedge these payables. Currency call options on the pound with expiration dates in one year currently have an exercise price of $$1\mathrm{.}20$ and a premium of $$0\mathrm{.}03.$

Mullen Co$.$ wishes to use its own forecast of what the spot rate might be for the pound one year from now. The company believes there are three possible outcomes for the spot rate for the pound in one year. These three scenarios are shown in the following table:

$\backslash$table$[[$Scenario$,$Probability,$\backslash$table$[[$Pound Spot$],[$Rate in $1$ Year$]],\backslash$table$[[$Option$],[$Premium$]],\backslash$table$[[$Total Price Per Unit,$],[$with Premium$]],\backslash$table$[[$Total Price Paid for$],[100,000$ Pounds$]],\backslash$table$[[$Exercise$],[$Options$?]]],[1,25\mathrm{.}00\%,$$$1\mathrm{.}12,$$$0\mathrm{.}03,$$$1\mathrm{.}15,$$$115,000,$no$],[2,50\mathrm{.}00\%,$$$1\mathrm{.}22,$$$0\mathrm{.}03,$$$1\mathrm{.}23,$$$123,000,$yes$],[3,25\mathrm{.}00\%,$$$1\mathrm{.}32,$$$0\mathrm{.}03,$$$1\mathrm{.}23,$$$123,000,$yes$]]$

Mullen would like to analyze the possible dollar cash outflows from not hedging the payables. Using this strategy case, the possible dollar cash outflows are shown in the following table:

$\backslash$table$[[$Scenario$,$Probability,Pound Spot Rate in $1$ Year,Total Price Paid for $100,000$ Pounds$],[1,$$$1\mathrm{.}12,25\mathrm{.}00\%,$$$112,000$