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Question
In April 2012, an FI bought a one-month sterling T-bill paying 100 million in May 2012. 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 .
If the exchange rate in one month is $1.55/1, what action should the FI take in regards to the hedge?
A. Call the 100 million proceeds of the T-bill from the option writer for $160 million
B. Put the 100 million proceeds from the T-bill to the option writer for $160 million.
C. Put the 100 million proceeds from the T-bill to the option writer for $155 million.
D. Call the 100 million proceeds of the T-bill from the option writer for $155 million
E. Allow the option contracts to expire since they are out of the money.
Answer
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