Question
Trefor, a US firm, has a sterling () receivable of 300,000 from a UK customer due one year from now. Trefor has no use for
Trefor, a US firm, has a sterling () receivable of 300,000 from a UK customer due one year from now. Trefor has no use for sterling currency and will exchange the receipt into US dollars ($). The spot exchange rate now is 1=$1.34 and the one- year forward exchange rate is 1=$1.31. Assume the forecasted spot rate in one years time is 1=$1.28 or 1=$1.38, with equal probability. The discount rate is zero.
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(a) What is the expected dollar value of Trefors receivable if it chooses:
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(i) not to hedge the receipt?
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(ii) to use a forward hedge?
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(b) One year sterling put options and sterling call options are available at a cost of
$0.03 per with an exercise price of 1.32.
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(i) How could Trefor make use of an option hedge for its sterling receivable?
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(ii) What will be the expected value in dollars of the outcome of the option hedge?
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(c) If Trefor is concerned only about downside risk, is it better to choose the forward hedge or the option hedge? Explain. (60 words)
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(d) An alternative hedging strategy for Trefor is to use futures contracts. Are there any advantages to using futures instead of a forward exchange extract? Explain. (60 words)
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(e) Briefly discuss the implications of the Capital Asset Pricing Model for the relationship between the current spot price of an asset and the discount offered by the seller of a futures contract.
I'll give good rating please help.
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