In April 2016,an FI Bought a One-Month Sterling T-Bill Paying

In April 2016,an FI bought a one-month sterling T-bill paying £100 million in May 2016.The FI's liabilities are in dollars,and current exchange rate is $1.6401/£1.The bank can buy one-month options on sterling at an exercise price of $1.60/£1.Each contract has a size of £31,250,and the contracts currently have a premium of $0.014 per £.Alternatively,options on foreign currency futures contracts,which have a size of £62,500,are available for $0.0106 per £.

If the exchange rate in one month is $1.55/£1,what action should the FI take in regards to the hedge?

A) Call the £100 million proceeds of the T-bill from the option writer for $160 million.
B) Put the £100 million proceeds from the T-bill to the option writer for $160 million.
C) Put the £100 million proceeds from the T-bill to the option writer for $155 million.
D) Call the £100 million proceeds of the T-bill from the option writer for $155 million.

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free