baton rouge a Us firm will 3 million pound in one year to pay for...
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Finance
baton rouge a Us firm will 3 million pound in one year to pay for its import. given the following information:
360-day uk borrowing interest rate =7%
360-day uk lending interest rate =5%
360 day us borrowing inTErest rate =4%
360 day us lending interest rate =3%
360-day forward rate of the british pound = us $1.63
spot rate of british pound =us $1.59
one year call option: exercise price=$1.60, premium=$0.03
one year put option: exercise price=$1.61, premium=$0.04
expected one-year spot rate=$1.64
required
a. give two reasons why baton rouge would consider hedging payables
b. showing and explaining all your workings determine whether or not the firm should use an options or a money market hedge to hedge its payables. justify your answer
c. you are an importer of goods from the united kingdom and you believe that british pound will substantially appreciate in the future. explain whether or not you will seek to hedge your payables which are denominated in pounds.
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