1. A firm expects a cash inflow of £570,000 in six months. Current exchange rate is $1.55/£. Firm will have to sell pounds in six months. Consider 3 possible spot prices in six months.
-$1.43/£
-$1.52/£
-$1.67/£
A) What kind of option, put or call, is appropriate to hedge with?
B) Which scenario(s) will the firm exercise their option? (Assume an exercise price of $1.55/£)
C) Which one scenario does the firm hopes will happen?
D) In that one scenario, what is the option worth at maturity?