Boeing imported a Rolls-Royce jet engine for £10 million payable in three months. The current spot rate is $1.36/£ and three-month forward rate is $1.3/£. A three-month put option on pounds with a strike price of $1.32/£ has a premium of $0.015 per pound, while a three-month call option on pounds with the same strike price has a premium of $0.018 per pound . Currently, three-month interest rate is 3.2% per annum in the U.S. and 4.4% per annum in the U.K.
Boeing is considering alternative ways of hedging this foreign currency payable. It tries to minimize the dollar cost of paying off the payable. All questions below refer to cash flows in three months.
1. If Boeing decides to hedge using options, what option (call or put) should they buy? At what future spot rate will they exercise the option? What would be the maximum U.S. dollar cost for Boeing?