Ganado — the same U. S.-based company as discussed in this chapter, has concluded a second larger sale of telecommunications equipment to Regency (U. K.). Total payment of £3,000,000 is due in 90 days. Maria Gonzalez has also learned that Ganado will only be able to borrow in the United Kingdom at 14% per annum (due to credit concerns of the British banks). Given the following exchange rates and interest rates, what transaction exposure hedge is now in Ganado’s best interest? AssumptionValues
90-day A/R in pounds3,000,000 pounds
Spot rate, US$ per pound ($/pounds)$1.7620
90-day forward rate, US$ per pound ($/pounds)
1.7550
3-month U. S dollar investment rate6%
3-month U. S dollar borrowing rate8%
3-month U. K investment interest rate8%
3-month U, K borrowing interest rate14%
Put option on the British pound:Stike rates, US$/pound ($/pounds)
Strike Rate ($/pounds)$1.75
Put option premium1.5%
Strike rate ($/pounds)$1.71
Put option premium1%
Trident's WACC12%
Maria Gonzalez's expected spot rate in 90-day US$ per pound ($/pound)$1.785