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Assume that today is June 30 . You have been asked to help a UK...

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Accounting

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Assume that today is June 30 . You have been asked to help a UK client who is scheduled to pay $US3,000,000 on September 30,92 days into the future. Assume that your client can borrow and lend pounds at 5% per annum. [Assume that in the UK, interest calculations are made on the basis of a 365 day year.] (a) Describe the nature of your client's transaction exchange risk. (2 Marks) (b) What is the option cost for a September 30 maturity with a strike price of STG0.70/USD1 to hedge the transaction? The option premiums per 100 dollars are STG1.75 for calls and STG2.45 for puts. ( 2 Marks) (c) How would increasing the time to maturity of the above option affect the foreign currency option value? (2 Marks) (d) What is the maximum STG cost (including the accumulated cost of the premium) that your client will experience in September

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