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Advise the company on a good hedging strategy

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Question - A US based IT firm required GBP 100000 in 180 days. The company feels that exchange rates are expected to fluctuate in the next 6 months. Their near accurate estimate based on a good quality research were as below:

Current Rate of GBP = USD 1.50

180 days forward rate for GBP = USD 1.48

Call premium USD 0.02 (strike price of USD 1.50 for 180 days)

Interest Rates in London for deposits - 4.5% and for loans - 5.1%

Interest Rates in New York for deposits - 4.5% and for loans - 5.1%

A fair estimate of exchange rate after 180 days is expected to be USD 1.44 with a probability of 20%, USD 1.46 with a probability of 60% and USD 1.53 with a probability of 20%.

Advise the company on a good hedging strategy. Make suitable assumptions if required and state the same?

Reference no: EM133036894

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