You are a British exporter who knows in December that you will receive SI5 million in three months (March) The current spot exchange rate is $1 5 , and the March forward exchange rate is also $1 5 Calls on the British pound are quoted by your bank for the exact amount that you desire, as follows Ma...

Again assume that we buy the calls by borrowing pounds at a zero interest rate For example to insure with 150 strike calls on the we need to buy calls ...

You are a British exporter who knows in December that you will receive SI5 million in three

Question:

You are a British exporter who knows in December that you will receive SI5 million in three months (March). The current spot is $1.5/£, and the March forward is also $1.5/£. Calls on the British pound are quoted by your bank for the exact amount that you desire, as follows:
March Sterling Options (all prices in $ per £)
Strike Call £
1.50.......................... 0.03
1.55.......................... 0.015
1.60.......................... 0.005
Calculate the £ value of the $15 million received in three months, assuming that the £:S spot in March is equal to 1.3. 1.1, 1.5. 1.6, 1.7, and 1.8 dollar per pound. Perform this calculation under five different scenarios about your hedging decision in December:
■ You do nothing.
■ You hedge with forward contracts.
■ You insure with calls 150.
■ You insure with calls 155.
■ You insure with calls 160.
Put all of these figures in a table, and discuss the relative advantages of the various strategies. Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...