Question

2. A US based IT firm required GBP 100000 in 180 days. The company feels that exchange
rates are expected to fluctuate in the next 6 months. Their near accurate estimate based
on a good quality research were as below:
Current Rate of GBP = USD 1.50
180 days forward rate for GBP=USD 1.48
Call premium USD 0.02 (strike price of USD 1.50 for 180 days)
Interest Rates in London for deposits - 4.5% and for loans - 5.1%
Interest Rates in New York for deposits - 4.5% and for loans - 5.1%
A fair estimate of exchange rate after 180 days is expected to be USD 1.44 with a
probability of 20%, USD 1.46 with a probability of 60% and USD 1.53 with a
I
0.6
probability of 20%.
0.2
Advise the company on a good hedging strategy. Make suitable assumptions if required
and state the same
10 Marks)​

Answer 1

Answer:

A US based IT firm required GBP 100000 in 180 days. The company feels that exchange rates are expected to fluctuate in the next 6 months.

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