Question

2. Jimmy's Apple Company imports apples to Virginia from Japan.  A vendor in Japan has agreed to a price of 10,000,000 Japanese yen, due in 90 days. The following statistics describe the current state of the Japanese Yen-Dollar FX market.

1. The spot rate is USD 0.0682/JPY
2. The 90-day interest rate in Japan is 2.54%
3. The 90-day interest rate in the US is 1.68%

The option market has the following contracts available:

A call option on 10,000,000 JPY with a strike price equal to USD $690,000 (I.e., per Japanese Yen is $0.0690) will cost $31,000.

A put option on 10,000,000 JPY with a strike price equal to USD $690,000 (I.e., per Japanese Yen is $0.0690) will cost $15,000.

What is your estimate for the cash flow in terms of USD, which will result from the firm’s following choices: to not hedge at all, use a forward market hedge, or use one of the options (listed above) to hedge. For the options choice, you need to decide whether a call or a put is most appropriate. Note that your answers should be negative as the cash flow is to pay a vender.

Spot Market at S(1)	No Hedge	Options	Forward Markets
USD 0.0600/JPY
USD 0.0625/JPY
USD 0.0650/JPY
USD 0.0675/JPY
USD 0.0700/JPY
USD 0.0725/JPY
USD 0.0750/JPY

Answer 1

Payble	-10000000	yen
due in	90	days
spot price	$                        0.06820	per yen
spot payble	$                     -6,82,000
Options Hedge payble
science payble in future hence call option will be taken
payble	$                     -6,90,000
premium	$                         -31,000
	$                     -7,21,000
Future Price
.0682*(1.0254/1.0168)	$                           0.0688
payble	$                     -6,87,768
Spot per yen $ s1	No hedge(paybleS1-spot payble)	Options hedge	farword
0.06	$                           82,000	$        -1,21,000	-87768
0.0625	$                           57,000	$            -96,000	-62768
0.065	$                           32,000	$            -71,000	-37768
0.0675	$                             7,000	$            -46,000	-12768
0.07	$                         -18,000	$            -21,000	12232
0.0725	$                         -43,000	$                4,000	37232
0.075	$                         -68,000	$              29,000	62232

Farmula used are given below

Payble	-10000000	yen
due in	90	days
spot price	0.0682	per yen
spot payble	=F6*F3
Options Hedge payble
science payble in future hence call option will be taken
payble	-690000
premium	-31000
	=SUM(F12:F13)
Future Price
.0682*(1.0254/1.0168)	=0.0682*(1.0254/1.0168)
payble	=-F17*10000000
Spot per yen $ s1	No hedge(paybleS1-spot payble)	Options hedge	farword
0.06	=-E24*10000000-($F$8)	=$F$14+(E24*10000000)	=$F$19+(E24*10000000)
0.0625	=-E25*10000000-($F$8)	=$F$14+(E25*10000000)	=$F$19+(E25*10000000)
0.065	=-E26*10000000-($F$8)	=$F$14+(E26*10000000)	=$F$19+(E26*10000000)
0.0675	=-E27*10000000-($F$8)	=$F$14+(E27*10000000)	=$F$19+(E27*10000000)
0.07	=-E28*10000000-($F$8)	=$F$14+(E28*10000000)	=$F$19+(E28*10000000)
0.0725	=-E29*10000000-($F$8)	=$F$14+(E29*10000000)	=$F$19+(E29*10000000)
0.075	=-E30*10000000-($F$8)	=$F$14+(E30*10000000)	=$F$19+(E30*10000000)