Hedging Payables with Currency Options
Response to the following problem:
Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 100,000 pounds in 90 days. Three call options are available that have an expiration date 90 days from now. Fill in the number of dollars needed to pay for the payables (including the option premium paid) for each option available under each possible scenario in the following table:
If each of the five scenarios had an equal probability of occurrence, which option would you choose? Explain.