Determine what is the cost of the option hedge

Assignment Help Econometrics

Reference no: EM13219982

Raider Inc., an American importing firm anticipates an outflow of ¥893 million in 6 months. Raider's management team is worried about the course of the ¥/$ exchange rate over the next 6 months and decides to hedge. The current spot and forward rates are S0=121 ¥/$ and Ft=6 months = 125 ¥/$. The $-interest rate is 5.56% and the ¥-interest rate is 0.48%.

a. Compute the $ cost to Raider Inc. if it hedges its position using the forward market.

b. Compute the $ cost to Raider Inc. if it hedges its position using the money market.

c. Which of the two above hedges is best for Raider Inc.?

d. Alternatively, Raider Inc. is contemplating the use of an options hedge. Sanwa bank is offering to Raider Inc. the following options: i. Call option on ¥893 million at K=121 ¥/$, with a 3.3% premium (price as a percent of current spot rate). ii. Put option on ¥893 million at K=121 ¥/$, with a 2.75% premium (price as a percent of current spot rate).

e. What is the cost of the option hedge?

Reference no: EM13219982

Questions Cloud

Discuss ways that each party can achieve a better solution : In using game theory, both parties have dominant strategies that lead to a best case for each individual. However, these decisions result in a worst case for the combination of the two. Discuss ways that each party can achieve a better solution

What is the difference between using system.data : What is the difference between "using System.Data;" and directly adding the reference from "Add References Dialog Box"?

What is the total tax revenue from a tax rate of t : Consider a worker who is paid a wage of $20 per hour. The worker has a disutility h^2 of working h hours. Assume that the worker faces a tax rate t. Thus, his net (after-tax wage rate is $20 (1 - t)). (i) How many hours will the worker work if his..

Compute the ratio of acid to salt at ph 5 : a. For a weak acid with a pKa of 6.0, show how you would calculate the ratio of acid to salt at pH 5. b. Suppose you have just added 100 mL of a solution containing 0.5 mol of acetic acid per liter to 400 mL of 0.5 M NaOH. What is the final pH?

Determine what is the cost of the option hedge : Raider Inc., an American importing firm anticipates an outflow of ¥893 million in 6 months. Raider's management team is worried about the course of the ¥/$ exchange rate over the next 6 months and decides to hedge.

What amount of damages will the court award to cameron : Cameron declined to appear in the action movie. Cameron filed suit against Colossus for breach of contract. Will this suit be successful? If so, what amount of damages will the court award to Cameron? Explain.

Show how an assembly might replace : show how an assembly might replace this pseudo-instruction with the true instructions to achieve the same effect. You solution must observe MIPS register use conventions.

Explain the general henderson-hasselbalch equation : Give the general Henderson-Hasselbalch equation and sketch the plot it describes (pH against amount of NaOH added to a weak acid). On your curve label the pKa for the weak acid, and indicate the region in which the buffering capacity of the system..

Explain why logic is an important part of oop : Logic is a key factor in laying out the processes for programming a game/application/website. Explain why logic is an important part of OOP.

User Account

All Pages