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  3. a) baton rouge, a u.s. firm will need 3 million in

a) Baton Rouge, a U.S. firm will need 3 million in one year to pay...

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a) Baton Rouge, a U.S. firm will need 3 million in one year to pay for its imports. Given the following information: 360-day U.K. borrowing interest rate = 7% 360-day U.K. lending interest rate = 5% 360-day U.S. borrowing interest rate = 4% 360-day U.S lending interest rate = 3% 360-day forward rate of the British pound = US$1.63 Spot rate of the British pound = US$1.59 = $1.60 One-year call option: Exercise price premium = $.03 One-year put option: Exercise price = $1.61: premium = $.04 Expected one-year spot rate $1.64 Required: i) Give two reasons why Baton Rouge would consider hedging its payables. (3 marks) Showing and explaining all your workings, determine whether or not the firm should use an options or a money market hedge to nedge its payables. Justify your response

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