Do you recommend using a call or put option to hedge the exchange rate risk? Explain.
Do you recommend an option with expiration in Feb. or March?
Calculate the US dollar profit or loss for each possible outcome; there will be more than one possible outcome for each option. Recall that with an option, the option does not have to be exercised; the holder may choose to trade in the future spot market. The holder's choice depends on the future spot rate.
Note: You will do these calculations for either all of the call options or all of the put options and for either all of the Feb or all of the March options, depending on your answer to the first two questions above.
Hint: Since Dozier's motive is hedging, you first calculate the revenue in dollars that Dozier will receive for the Pound receivable. Then subtract Dozier's Costs given in Case A exhibit 3.
Which option do you recommend? Explain.
Note: You must now select one of the options with a given maturity and strike price.
Compare the option hedge to the forward hedge (in the A case) and to remaining unhedged. Which do you recommend? Explain.
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