In April 2016,an FI Bought a One-Month Sterling T-Bill Paying

question 2

Multiple Choice

In April 2016,an FI bought a one-month sterling T-bill paying £100 million in May 2016.The FI's liabilities are in dollars,and current exchange rate is $1.6401/£1.The bank can buy one-month options on sterling at an exercise price of $1.60/£1.Each contract has a size of £31,250,and the contracts currently have a premium of $0.014 per £.Alternatively,options on foreign currency futures contracts,which have a size of £62,500,are available for $0.0106 per £.

What is the foreign exchange risk that the FI is facing,and what type of currency option should be purchased to hedge this risk?

• A)The FI should use put options to hedge the depreciation of the dollar.
• B)The FI should use call options to hedge the depreciation of the pound sterling.
• C)The FI should use put options to hedge the depreciation of the pound sterling.
• D)The FI should use call options to hedge the depreciation of the dollar.

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Definitions:

Dendrites

Extensions of neurons that receive signals from other neurons or sensory stimuli and convey them toward the cell body.

Chemical Synapse

A type of synapse at which a chemical (neurotransmitter) is released from the axon terminal of a neuron into the synaptic cleft between neurons, facilitating neural communication.

Synaptic Cleft

The tiny gap between two neurons, across which neurotransmitters travel to transmit nerve impulses.

Voltage-Gated Channel

A type of ion channel that opens or closes in response to changes in the electrical potential across a cell membrane.