XXX Inc. is a US-Based manufacturer of heavy industrial equipment just sold the equipment for  £5,600,000  to a company in UK. According to the terms of sale, the buyer is allowed to make a payment in 6 months (180-days). You need to help XXX Inc. to explore different ways of hedging its receivables and to make a decision what strategy is more beneficial to use.

Current spot rate $1.3511/ £

6-months forward rate $1.3597/ £

6-month expected FX rate $1.3620/ £

180-day investing rate in USA 2.4%

180-day borrowing rate in USA4.0%

180-day British investing rate1.6%

180-day British borrowing rate3.6%

XXX's WACC12.0%

Premium PUT Option2.0%

Premium CALL Option2.5%

CALL and PUT options strike price$1.361/ £

Using the date above, calculate:

1)How much should XXX Inc expect to receive in USD in 6 months. If the management chooses to remain unhedged.

2)How much will XXX Inc receive in USD in 6 months, if its management choose to hedge in the forward market.

3)For money market hedge, find the amount you need to borrow or invest today in  £.

4)For money market hedge, how much USD will you receive today from exchanging the borrowed GPB  £.

5)Calculate the total proceeds of money market hedge in USD. (Hint: carry the amount forward 180 days)

6)What option should XXX Inc. buy to judge using the option? Call or Put

7)Calculate the cost of the option (option premium) in USD today.

8)Adjust the option's cost for the Time Value of Money.

9)Find the total amount in USD XXX Inc will receive in 6 months. If the management chooses the option hedge and the option is exercised? 

10) What hedging strategy does the XXX's management have to choose? a. Money market hedge, b. Option hedge, c. Forward hedge