A U. S. firm holds an asset in Great Britain and faces the following scenario:
State 1 State 2 State 3
Probability 25% 50% 25%
Spot rate $ 2.50 / £ $ 2.00 / £ $ 1.60 / £
P * £ 1,800 £ 2,250 £ 2,812.50
P $4,500 $4,500 $4,500
Which of the following would be an effective hedge?
A) Buy £2,500 forward at the 1-year forward rate, F1 ($/£), that prevails at time zero.
B) Sell £25,000 forward at the 1-year forward rate, F1 ($/£), that prevails at time zero.
C) Sell £2,278.13 forward at the 1-year forward rate, F1 ($/£), that prevails at time zero.
D) none of the options
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