Reference no: EM132396522

ICTV is a U.S. Company that developes software for cable television networks. Executives at ICTV have just negotiated a £20 million deal with the British cable operator Telewest. ICTV will receive the payment in six months time, after ICTV demonstrates a prototype proving the viability of its technology. If Telewest is not satisfied with the technology, it can cancel the contract at that time and pay nothing. ICTV executives have two major concerns: 1) their engineers may not be able to meet Telewest's technology requirements and 2) even if the deal succeeds, the British pound may fall, reducing the dollar value of the £20 million payment.

Suppose the current exchange rate is $1.752/£, the six-month forward exchange rate is $1.75/£, and a six month put option on the British pound with a strike price of $1.75/£ is trading for $0.05/£. Compare ICTV's outcomes if it does not hedge and the British Pound falls to $1.50/£, hedges using a forward contract or hedges using the put option.