Coca-cola will receive totaling £2.5 million next month from British customer. It can buy pound put options with a strike price of $1.65 at a premium of 2.0 cents per pound. The spot price of the pound is currently $1.68, and the pound is expected to trade in the range of $1.62 to $1.70. Cocacola also can take a short position in the pound futures contract with futures price at $1.64.
a. How many options and futures contracts will Coca-Cola need to protect its payment? Each contract size is £31,250 for options and £62,500 for futures and calculate the breakeven point
b. Diagram Cocacola’s profit and loss associated with the put option position and futures position within its range of expected exchange rates. Ignore transaction costs and margins.
c.Calculate what Cocacola would gain or lose on the option within the range of expected future exchange rates at three points: $1.63, $1.66 & $1.70