A/R £ 1,000,000 AP £ 1,000,000

S0 (GBP/USD) 1.764 S0 (GBP/USD) 1.764

F90 (GBP/USD) 1.754 F90 (GBP/USD) 1.754
S90 (GBP/USD) 1.76 S90 (GBP/USD) 1.76
WACC 12% WACC 12%
USD borrowing rate 8% USD borrowing rate 8%
USD investment rate 6% USD investment rate 6%
GBP borrowing rate 10% GBP borrowing rate 10%
GBP investment rate 8% GBP investment rate 8%
Put option Call option
Strike price (GBP/USD) 1.75 Strike price (GBP/USD) 1.75
Premium 1.50% Premium 1.50%

1. Remain unhedged 1. Remain unhedged

Do nothing at the moment, wait for90 days

Do nothing at the moment, wait for 90 later, pay the equivalent amount to
days, receive 1million GBP and convert at 1million GBP in USD at the future spot
future spot exchange rate 1.760 exchange rate 1.760
A/R90 $ 1,760,000 AP90 $ 1,760,000

2. Forward market 2. Forward market

Buy the forward contract with the forward Buy the forward contract with the forward
rate @F90(GBP/USD) 1.754 rate @F90(GBP/USD) 1.754

90 days later, receive 1million GBP and 90 days later, convert the equivalent
convert to USD at F90 amount in USD to 1million GBP at F90
A/R90 $ 1,754,000 AP90 $ 1,754,000

3. Money market 3. Money market

Borrow the equivalent amount of 1million Invest the equivalent amount of 1 million
GBP after 90 days GBP after 90 days
Borrowing amount £ 975,609.76 Investment amount £ 980,392.16
Convert that borrowing amount into USD at Convert that investment amount into USD
spot exchange rate @1.7640 at the spot exchange rate @1.7640
AR0 $ 1,720,976 AP0 $ 1,729,411.76
A/R90 $ 1,772,604.88 AP90 $ 1,781,294.12
90 days later, receiving 1million of GBP to 90 days later, receiving 1million GBP from
pay off the initial loan the investment to pay off AP

4. Options 4. Options
Cost of option (at t=0) $ 26,460.00 Cost of option (at t=0) $ 26,460.00

Because the strike price is below the future Because the strike price is below the future
spot exchange rate, do not exercise the spot exchange rate, it is a call option, we
option will exercise the option
A/R90 (no including the co $ 1,760,000.00 AP90(not including the cos $ 1,750,000.00
A/R90 $ 1,732,746.20 AP90 $ 1,722,746.20

Remain unhedged $ 1,760,000 Remain unhedged $ 1,760,000

Forward market $ 1,754,000 Forward market $ 1,754,000
Money market $ 1,772,605 Money market $ 1,781,294.12
Option $ 1,732,746 Option $ 1,722,746.20