You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer in terms of US$.

Information for Forward Contract:

Forward exchange rate (one yr): 1.54 $/BP

Information for Money Market Instruments (MMI):

Current exchange rate: 1.50 $/BP

Investment return at Aerion Fund Management (in UK): 4% annual

Interest rate of borrowing from Bank of America (in USA): 2% annual

Information you need for Currency Options Contract:

Options premium: 0.015 $/BP

Interest rate of borrowing from Bank of America (USA): 2% annual

Allowed to exercise options at 1.54 $/BP

Let's suppose you signed the Currency Options Contract. The actual exchange rate at the time of the payment is 1.50 $/BP. What would you do?

answer:

A. Exercise the option and take 1.54 $/BP.

B. Do not exercise the option and take the actual exchange rate of 1.50 $/BP.