Reference no: EM133072906
Recently, SJW purchased un-refined oil for 2 million baht and must pay for the oil in three months. SJW is also currently in negotiations to sell refined oil in Thailand. If the negotiations are successful, SJW will receive 4 million baht in three months, for a net cash inflow of 2 million baht.
The following options are available:
-Call option premium on 1 THB = AUD 0.003
-Put option premium on 1 THB = AUD 0.002
-Call and put option strike price = AUD 0.098
-One option contract represents THB 500,000.Q. Consider three scenarios:
1. The baht's spot rate at option expiry is equal to the exercise price of AUD 0.098.
2. The baht depreciates to AUD 0.08.
3. The baht appreciates to AUD 0.11.
For each scenario, consider both the case when the negotiations regarding refined oil are successful and the case when they are not successful. Assess the effectiveness of the long straddle in each of these situations by comparing it to a strategy of using long call options to hedge
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