Costs of hedging by forward contracts and option contract

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Reference no: EM132057273

Alcoa Chemical, a US company, has sold £3 million chemicals to CPL Co. Payment is due in 90 days.

Spot rate: $1.63/£

90-day forward rate $1.59/£

90-day U.S. dollar interest rate (annualized) 3.2%

90-day Pound interest rate (annualized) 5%

90-day call option on pound at $1.61/£ premium $0.03 per pound

90-day put option on the pound at $1.61/£ premium $0.04 per pound

(a) What is the hedged value of Alcoa's receivable using the forward market hedge?

(b) What is the hedged value of Alcoa's receivable using the money market hedge?

(d) What alternative is available to Alcoa to use currency options to hedge its receivable? What is the hedged value of Alcoa's receivable using the option hedge?

(e) Discuss and compare the costs of hedging by forward contracts and option contracts.

Reference no: EM132057273

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