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Wantree Ltd, a United Kingdom company, has bought goods from a supplier based in the...

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Accounting

Wantree Ltd, a United Kingdom company, has bought goods from a supplier based in the United States for which USD 2,000,000 is to be paid in six months time. The companys treasury manager wishes to hedge against the foreign exchange risk and the three methods which the company usually considers are: Making lead payments Using forward exchange contracts Using currency options The United Kingdom annual interest rate on 3-months deposit is 7% and 6-months deposit is 9%. The exchange rates are as follows: ($/ 1 ) Spot 1.3675 - 1.3845 3 months forward 1.4535 - 1.4688 6 months forward 1.5249 - 1.5969 The currency options listed in the Chicago Mercantile Exchange have a contract size $ 100,000 and the premiums is in cents per $ available only at a strike price $ 1.60 as per table below: Contract size: $ 100,000 Calls ( cents per $) Strike price ($/1 ) 3 months 6 months 1.60 4.45 5.05 (a) Being the Treasury manager, advise Wantree Ltd on the cheapest and most recommended hedging strategy for the US $ payment that is due in six months. Include all relevant calculations.

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