Reference no: EM131063515
Company's Manufacturing’s Transaction Exposure
UK 3-month borrowing rate: 10% a year
UK 3-month lending rate: 8% a year
US 3-month borrowing rate: 8% a year
US 3-month lending rate: 6% a year
June put option for £1m: strike price $1.75, premium 1.5%
Dayton’s advisory service forecasts that the spot rate in 3 months will be 1.76 $/£
1. Calculate the dollar value of the unhedged position/receivable in three months. Explain your calculations.
2. Calculate the dollar value of the position if Dayton wish to hedge its transaction exposure in the forward market. Explain the hedging strategy and calculations.
3. Calculate the dollar value of the position if Dayton wish to hedge its transaction exposure in the money market. Explain the hedging strategy and calculations
4. Calculate the dollar value of the position if Dayton wishes to hedge its transaction exposure in the option market. Explain the hedging strategy and calculations. Spot rate in 3 months is 1.76 $/£
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