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Consider the following information for the U.K. and the U.S: U.K. inflation rate   (annual)                         &nbs

Consider the following information for the U.K. and the U.S:

U.K. inflation rate   (annual)                               3.56%

U.S. inflation rate                                               1.95%

GBP/USD spot rate                                          1.3079

6-month GBP Eurodollar deposit rate               0.9131%

6-month USD Eurodollar deposit rate               2.83%

Sept. futures rate on the CBOE                        1.3234

Premium for a Sept 1.32 call                             0.05

Premium for a Sept 1.32 put                             0.06

a. Suppose you will receive 100,000 GBP in 6-months. Should you hedge? Which is the best way (forward, future, money market, or option) to hedge?

b. If you will pay 100,000 in 6-months, should you hedge? Again which is the best hedge? In both scenarios take Brexit into account.

Please give numerical examples and proof.

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