Answer Happy

(Transaction Exposure) Trident-AU.S.-based company, has concluded a sale of telecommunications equipment to Regency (U.K.). A total payment of £2,000,000 is due in 90 days. The following table shows relevant exchange rates and interest rates. To hedge, the company is considering using £2,000,000 put options with the strike of $1.55/£. Comparing against the forward hedge, the break-even spot rate for such options hedge is $ x /£ in 90 days. (Keep four decimal numbers/) Assumptions 90-day A/R in pounds Spot rate, US$ per pound (S/£) 90-day forward rate, US$ per pound ($/£) 3-month U.S. dollar investment rate 3-month U.S. dollar borrowing rate 3-month UK investment interest rate 3-month UK borrowing interest rate Put options on the British pound: Strike rates, US$/pound (S/£) Strike rate (S/£) Put option premium Strike rate (S/E) Put option premium Strike rate ($/£) Call option premium Trident's WACC Expected spot rate in 90 days, US$ per pound ($/£) Value £2,000,000.00 $1.5610 $1.5620 3% 6% 9% 14% $1.55 6.6% $1.54 8.4% $1.55 9.3% 6.000% $1.5431