Finance manager is considering various hedging strategies including forward contracts, money market hedging, options, or remaining unhedged, to…

(a) Forward contract: Dollar needed in 3-months = £ 2,50,000 x 116.70 = 2,91,75,000/- (b) Money market hedge: Borrow £, convert to ₹, invest, repay £ loan in 3-months Amount in £ to be borrowed = £ 2,50,000/1.01 = £ 2,47,525 With Spot Rate of 115/£ the converted amount shall be = 2,84,65,375 Add: Interest on the same amount @ 6% p.a. = 4,26,981 Amount available after the period of 3-months = 2,88,92,356 (c) Option: Expected Spot rate in 3-months (1) Prem./ unit (2) Exercise Option (3) Net per £ (4) Total price for £2,50,000 xi in ₹ £2,50,000 X (Col 4) (5) Prob. pi (6) pi xi ₹ (7) (5 X 6) 114 1.60 Yes 114.40* 2,86,00,000 0.20 57,20,000 116 1.60 No 114.40* 2,86,00,000 0.50 1,43,00,000 118 1.60 No 116.40 2,91,00,000 0.30 87,30,000 2,87,50,000