(1) Desnoes & Geddes (D&G), a Jamaican beer and soft drink manufacturer, is expecting an inflow of 33.45 million US-$ in

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(1) Desnoes & Geddes (D&G), a Jamaican beer and soft
drink manufacturer, is expecting an inflow of 33.45 million US-$ in
the next five months. Today’s spot exchange rate is 35 Jamaican
dollars (J$) per US-$. D&G decides to hedge using options. The
J$ interest rate is 23.55%. They contact Citicorp, which offers the
following options on the US-$:
- American call option on the US-$ with T=3months, K=35 J$/US$,
and price C=3.5 J$/US$
- American put option on the US-$ with T=3months, K=35 J$/US$,
and price P=3.2 J$/US$
- American call option on the US-$ with T=6 months, K=35 J$/US$,
and price C=3.8 J$/US$
- American put option on the US-$ with T=6 months, K=35 J$/US$,
and price P=3.4 J$/US$
Answer the following questions, assuming that these options have
no resale value, and ignoring transactions costs.
a) Which option should D&G choose?
b) What is the minimum value in J$ per US-$ that D&G can
establish in this hedge (assuming CF occurs at T=5months)?
c) Suppose that five months later (i.e., at the time when
D&G receives 33.45 million US-$) the spot exchange rate is
37.66 J$/US-$. What should D&G do? How many J$ per US-$ will
they get?
d) Now, suppose that at the time D&G receive the 33.45
million US-$ the spot exchange rate is 30.66 J$/US-$. What should
D&G do? How many J$ per US-$ will they get?