Suppose you need to pay V= 50,000 GBP in a year from now. Spot rate of GBP is 1.3. You do not have enough USD to purchase 50,000 GBP right now. Depending on the state of economy, the GBP spot rate in a year from now may be: (A) Would you hedge the risk with a call or put option? 6. Suppose you need to pay V -50,000 GBP in a year from now. Spot rate of GBP is 1.3 You do not have enough USD to purchase 5

    Answer a) Under the plight to produce cancelment of 50,000 GBP after a year from now, we scarcity to suborn GBP from Forex bargain on forward objurgate . The modify objurgate destroy mingle in the occurrence , the destroy of modify objurgate can be hedge by interpretation of liberty contract.  

    we can hedge the destroy by

    • Long position in Seduce Liberty ( suborn seduce liberty )
    • Concise Position in Put Liberty ( hawk Put Liberty)

    Answer b) Strike figure of Seduce/put liberty (X) = 1.15 USD

    Premium (P) = 0.01

    Number of reduce = 50,000

    Pay impromptu from Long seduce liberty / concise Put liberty= Max ( S-X,0)

    Benefit from Long seduce liberty / concise Put liberty = [Max ( S-X,0) – P] * Number of reduce.

    State Spot Figure(S) Premium(P) Strike Figure(X) Number of reduce Payimpromptu (S-X) Benefit =Payoff-P Total Benefit (USD)
    Favorable 1.2 0.01 1.15 50,000 0.05 0.04 2000
    Neutral 1.3 0.01 1.15 50,000 0.15 0.14 7000
    Unfavorable 1.4 0.01 1.15 50,000 0.25 0.24 12000