AMB Aviation Services in the UK (AMB UK) has supplied Wright Airlines in the US with one of its wheelchair assistance solutions. Wright Airlines will make payment of $US 1,500,000 in three months’ time, once appropriate safety tests have been completed. The spot price today is $1.33 / £ and strike price on an option dated three months from now is $1.32 / £ with an option price of £0.06. The contract size is $50000. A. Briefly describe the nature of the transaction risk that AMB UK is facing. B. Explain what type of options AMB UK might use to hedge the exchange rate risk and how many options would be bought. C. If the exchange rate in three months’ time is $1.37 /£ explain whether AMB UK will exercise the option, what the net gain or loss on the option will be and the overall position of AMB UK compared to a situation in which they had not bought the option. D. If the exchange rate in three months’ time is $1.28 /£ explain whether AMB UK will exercise the option, what the net gain or loss on the option will be and the overall position of AMB UK compared to a situation in which they had not bought the option.
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