Alcoa Chemical, a US company, has sold £2 million chemicals to CPL Co. Payment is due in 180 days.
Spot rate: $1.62/£
180-day forward rate $1.56/£
180-day U.S. dollar interest rate (annualized) 3%
180-day Pound interest rate (annualized) 4%
180-day call option on pound at $1.59/£ premium $0.04 per pound
180-day put option on pound at $1.59/£ premium $0.05 per pound
(a) What is the hedged value of Alcoa's receivable using the forward market hedge?
(b) What is the hedged value of Alcoa's receivable using the money market hedge?
(c) Which of the hedging alternatives analyzed in parts (a) and (b) would you recommend to Alcoa? Why?
(d) What alternative is available to Alcoa to use currency options to hedge its receivable? What is the hedged value of Alcoa's receivable using the option hedge?
(e) What are the advantages and disadvantages of the option, forward and money market hedges on managing transaction exposure?