Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be

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Here is the answer for the question – Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be. You’ll find the correct answer below

Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53 respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy?

The Correct Answer is

sell pounds forward and received $155,000:Sell pounds forward:One-year forward rate = $1.51 × (1 + .0265) = $1.55Dollars received = 100,000 × $1.55 = $155,000Buy put option:Amount received per unit = $1.54 − $.03 = $1.51Total amount of receivables in U.S.$ = 100,000 × $1.51 = $151,000

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Reason Explained

sell pounds forward and received $155,000:Sell pounds forward:One-year forward rate = $1.51 × (1 + .0265) = $1.55Dollars received = 100,000 × $1.55 = $155,000Buy put option:Amount received per unit = $1.54 − $.03 = $1.51Total amount of receivables in U.S.$ = 100,000 × $1.51 = $151,000 is correct for Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be

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