Answer to Question #226725 in Financial Math for yoo

Question

Agyenim Boateng, owner of the Best Pineapple Company Ltd will be receiving 20,000 British pounds about one month from now as payment for pineapple juice produced and exported by his company. Agyenim is concerned about his exposure because he believes that there are two possible scenarios: (1) the pound will depreciate by 3 percent over the next month or (2) the pound will appreciate by 2 percent over the next month. There is a 70 percent chance that Scenario 1 will occur. There is a 30 percent chance that Scenario 2 will occur. Agyenim notices that the prevailing spot rate of the pound is GHS 8.1 and the onemonth forward rate is GHS 8.6. Agyenim can purchase a put option over the counter from a securities firm that has an exercise (strike) price of GHS 8.6, a premium of GHS0.025, and an expiration date of one month from now. Determine the amount of cedis received by the Best Pineapple Company under each of the two exchange rate scenarios if: a) The receivables to be received in one month are not hedge