1. You should treat January 14, 1986 as the date when you are performing your analysis and acting on the analysis (hedging or not hedging).;2. To reduce risk, Dozier will take the 10% initial deposit (pounds) and sell the pounds in the spot market on Jan 14.;3. Any dollars that Dozier receives on Jan 14 are deposited in the bank for 90 days.;4. For the purpose of your calculations, you may ignore the fact that currency option contracts for the pound come in 12,500 pound increments. However, you may discuss this limitation qualitatively in making your recommendation (last discussion question) below.;5. None of the option contracts mature on Apr 14, 1986. Ideally, Dozier would want an option that matures on that date for the purpose of hedging. In deciding which option maturity is best (Feb or Mar), you should consider this problem and choose the maturity that best meets Dozier?s hedging objective. First choose the option maturity that best meets Dozier?s objective. Then in your calculations below, you may treat the options as if they mature Apr 14. Qualitatively, however, you should consider this maturity mismatch in making your recommendation (last discussion question) below.;6. In exhibit 2, 144.41 U.S. cents per pound refers to the spot rate for the pound on Jan 14. This is inconsistent with what is reported elsewhere in both the A and B parts of this case. Continue to use the spot rate given in part A of this case for 1/14/86. For the rest of the table the rows correspond to a strike price between 130 cents and 150 cents per pound. The columns correspond to either call options or put options with either Jan, Feb, or March maturities. Any entry in the table (for example 0.50 cents per pound) is the option premium. In this example, 0.50 cents per pound is the premium for a put option with a March maturity and a strike price of 135 cents per pound.;Case B: First read the ?B? case, and then address the following questions;1. Do you recommend using a call or put option to hedge the exchange rate risk? Explain.;I recommend using a X option to hedge the exchange rate risk as?;2. Do you recommend an option with expiration in Feb. or March?;I recommend using an option with an expiration in Feb or March? because?;3. Calculate the US dollar profit or loss for each possible outcome, there will be more than one possible outcome for each option. Recall that with an option, the option does not have to be exercised, the holder may choose to trade in the future spot market. The holder?s choice depends on the future spot rate.;Note: You will do these calculations for either all of the call options or all of the put options and for either all of the Feb or all of the March options, depending on your answer to the first two questions above. Hint: Since Dozier?s motive is hedging, you first calculate the revenue in dollars that Dozier will receive for the Pound receivable. Then subtract Dozier?s Costs given in Case A exhibit 3.;4. Which option do you recommend? Explain.;I recommend the XXXX option because?;Note: You must now select one of the options with a given maturity and strike price.;5. Compare the option hedge to the forward hedge (in the A case) and to remaining unhedged. Which do you recommend? Explain.
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