Payment receive-appreciation and depreciation

Reference no: EM1314342

You are a financial adviser to a U.S. corporation that expects to receive a payment of 40 million Japanese yen in 180 days for goods exported to Japan. The current spot rate is 0.01 US dollars per Yen, so it takes .01 US dollars to buy one Yen. You are concerned that the U.S. dollar is going to appreciate against the yen over the next six months.

a) Assuming that the exchange rate remains unchanged, how much does your firm expect to receive in U.S. dollars?

b) How much would your firm receive (in U.S. dollars) if the dollar appreciated to 0.009 US dollars per Yen?

You could use a PUT options contract to protect your company against the risk of losses associated with the potential appreciation in the U.S. dollar. In your answer, assume that the current spot rate is 0.01 US dollars per Yen, and that the future rate is expected to be 0.009 US dollars per Yen. Your striking price is 0.0095 US dollars per Yen.

c) If the premium is $.0003 per yen (or .0003 dollars per yen), what is the total cost of the Put option contract?

d) If the spot rate in 180 days is .0097, do you exercise the option or let it expire?

i) What was your dollar gain or loss from holding the option contract?

e) If the spot rate in 180 days is 0.009 US dollars per Yen as you predicted, do you exercise the option or let it expire?

i) What is the net gain or loss from the contract (measured in dollars)?

Reference no: EM1314342

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