Crown Co Is Expecting to Receive 100,000 British Pounds in One

question 133

Multiple Choice

Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53 respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy?

• A) buy a put option and receive $150,000.
• B) sell pounds forward and receive $155,000.
• C) sell a call option and receive $156,000.
• D) sell a put option and receive $157,000.

---

Definitions:

Transcranial Magnetic Stimulation

A non-invasive procedure that uses magnetic fields to stimulate nerve cells in the brain, often used in treating depression.

Brain Disorders

A broad spectrum of health conditions affecting the brain and nervous system that can impact mental and physical functioning, ranging from epilepsy and dementia to psychiatric conditions like depression.

Serotonin

A neurotransmitter involved in regulating mood, appetite, and sleep, among other functions.