As treasurer of Tempe Corp., you are confronted with the following problem. Assume the 1...

As treasurer of Tempe Corp., you are confronted with the following problem. Assume the 1-year forward rate of the British pound is $1.59. You plan to receive 1 million pounds in 1 year. A 1-year put option is available. It has an exercise price of $1.61. The spot rate as of today is $1.62, and the option premium is $.04 per unit. Your forecast of the percentage change in the spot rate was determined from the following regression model:

The regression model was applied to historical annual data, and the regression coefficients were estimated as follows:

Assume last year’s inflation rates were 3 percent for the United States and 8 percent for the United Kingdom. Also assume that the interest rate differential (DINT_t) is forecasted as follows for this year:

Using any of the available information, should the treasurer choose the forward hedge or the put option hedge? Show your work.