Boeing imported a Rolls-Royce jet engine for £6.5 mil payable in one year The US interest rate...

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Boeing imported a Rolls-Royce jet engine for £6.5 mil payablein one year
The US interest rate 4.00% per annum
The UK interest rate 6.50% per annum
The Spot exchange rate $ 1.80/£ today
The company decides to use options to hedge the risk of poundexchange one year later. What kind of options should the companybuy? Put or Call?
Assume the strike price of the option is $1.82/£ with a premiumof $.02/£ paid today. What is the dollar cost one year later if thespot rate then is 1.60 and 2.00 respectively?
How to utilize the money market tools to hedge the risk of poundexchange one year later? In particular, answer which loan (US orUK) to borrow and to lend? How much is the dollar cost one yearlater (a number you would know today)?

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3.7 Ratings (418 Votes)

1 As it is a payable the company would use the Call option which would entitle it to buy the required pounds at the stated rate 2 Dollar cost under the call option If future spot rate is 160GBP The See Answer

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Boeing imported a Rolls-Royce jet engine for £6.5 mil payablein one yearThe US interest rate 4.00% per annumThe UK interest rate 6.50% per annumThe Spot exchange rate $ 1.80/£ todayThe company decides to use options to hedge the risk of poundexchange one year later. What kind of options should the companybuy? Put or Call?Assume the strike price of the option is $1.82/£ with a premiumof $.02/£ paid today. What is the dollar cost one year later if thespot rate then is 1.60 and 2.00 respectively?How to utilize the money market tools to hedge the risk of poundexchange one year later? In particular, answer which loan (US orUK) to borrow and to lend? How much is the dollar cost one yearlater (a number you would know today)?