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Participating forward contract

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It is May 18th. Devise a participating forward contract for a customer who is worried that sterling will fall against the dollar. You know that three-month otc. options cost:

ex. price call put
$/£ ¢/£ ¢/£

1.50 6.75 2.44
1.55 3.69 4.36
1.60 2.69 8.34

There is more than one such contract, so explain why you made your particular choice.

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The solution sets up a participating forward contract.

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For a participating forward to cover the risk of sterling falling, you buy a put on sterling and ...

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