Hedge the exchange rate risk of the company

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Reference no: EM131084267

A Brazilian refinery exported many tons of sugar to the U.S. and hence its profitability relies on a low exchange rate of U.S. dollars per Brazilian real (currently US$0.3315/R$). The risk manager is concerned that an exchange rate above US$0.3600/R$ would impair the company’s ability to make next year’s debt payments. The following option quotes are available to the company (OTC):

Option Strike Price Premium

December Call on real $0.3400/R$ $0.0045/R$

December Put on real $0.3400/R$ $0.0132/R$

Explain why buying the call option above can help hedge the exchange rate risk of the company? ?

Suppose the contract size is R$10,000,000, what is the profit or loss from buying this call if the spot rate in December is US$0.3500/R$? ?

Reference no: EM131084267

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