Calculate the net gainloss on the hedged position if the, Financial Management

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Calculate the net gainloss on the hedged position if the

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.

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