Multiple Choice
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?
A) buy a put option and receive $150,000.
B) sell pounds forward and receive $155,000.
C) sell a call option and receive $156,000.
D) sell a put option and receive $157,000.
Correct Answer:
Verified
Correct Answer:
Verified
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