Calculate and compare dollar amount to be received

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Reference no: EM133615879

Problem: Based on the economic forecasts, inflation in the United States is expected to be 6.9 percent, while inflation in United Kingdom is expected to be 3.7 percent over the next year. Husky Co. CFO believes that purchasing power parity holds. Spot rate of GBP is 1.2 USD. As a form of hedge, their Bank offered a GBP put option with an exercise price of 1.27 USD and a premium of 0.03 USD. 1. Calculate the GBP spot rate in one year based on these expectations and assumptions. 2. Should Husky Co. purchase the put option based on their estimate? Calculate payoff and profit/loss of the put option. 3. Assume Husky Co. has 500,000 GBP receivables in one year. US interest rate is 4%, while UK interest rate is 3%. Additionally, one year GBP forward rate is 1.25 USD. Calculate and compare dollar amount to be received in one year with money market hedge, forward contract, put option and no hedge.

Reference no: EM133615879

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