Firm USA puts in a bid of 1 million (British Pounds) on a property in England. If the bid is accepted, the firm will have to pay 1 million (British Pounds) in 6 months.
Current spot rate: 1 British Pounds=$1.4
Assume the firm enters into a long position on the following at- the- money call option:
Contract size: 31.250 (British Pounds)
Exercise price: $1.4
Option Premium: $0.05
Expiration: on a date after 6 months from now
The call position contains 32 contracts. Assume that after 6 months, the pound appreciates in value to 1 British Pound=$1.7, and the call premium increases to $.25.
Calculate the net gain(loss) on the hedged position if the bid is accepted.
(Please explain this problem in detail & show work) a.) .1 million, loss b.) .1 million, gain c.) .2 million, loss d.) .2 million, gain e.) .3 million, loss d.) .3 million. gain.