In April 2012, an FI Bought a One-Month Sterling T-Bill

Multiple Choice

In April 2012, an FI bought a one-month sterling T-bill paying £100 million in May 2012. The FI's liabilities are in dollars, and current exchange rate is $1.6401/£1. The bank can buy one-month options on sterling at an exercise price of $1.60/£1. Each contract has a size of £31,250, and the contracts currently have a premium of $0.014 per £. Alternatively, options on foreign currency futures contracts, which have a size of £62,500, are available for $0.0106 per £. How many options should the FI purchase, and what will be the cost?

A) 1,600 contracts for $16.96.
B) 1,600 contracts for $1,060,000.
C) 3,200 contracts for $44.80.
D) 3,200 contracts for $1,400,000.
E) 3,200 contracts for $2,800,000.