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soldi70 [24.7K]
3 years ago
11

Corona Co. is expecting to receive 100,000 British pounds in one year. Corona expects the spot rate of British pound to be $1.49

in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53 respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Corona Co. will receive under this strategy
Business
1 answer:
Grace [21]3 years ago
7 0

Answer:

Explanation:

1st strategy : Selling pound forward

The spot rate of the pound is quoted at $1.51.

The one-year forward rate exhibits a 2.65% premium.

The one-year forward rate = 1.51 ( 1+ 0.0265)

= $ 1.55

Dollars received = 100000 * 1.55 = $155000

2nd strategy : Buying put option

The strike price of put = $1.54

premium on option is $.03

Amount received per option = $ 1.54 - $ 0.03 =$1.51

Total Dollars received = 100000* 1.51 = $ 151000

the best possible hedging strategy is Selling pound forward and receiving $155000

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Answer:

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Journal Entries:

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iv. Accrual of interest and amortization of the premium on December 31, 2023:

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