Your firm purchased an equipment from a British company. Total cost was 50,000 (in 30 days). The pound is expected to appreciate against $ substantially in 30 days. Lets suppose it would be $1.6/ in 30 days.

Questions:

1. You decide to use option to hedge against the exchange rate risk. What would be your maximum (or minimum) strike price if it is possible for you to find that strike price?

2. After you bought the option, the spot exchange rate in 30 days turns out to be lower than the strike price. What would you do and what do you need to do?