Ways the seller of the boat can hedge above contract

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Reference no: EM131932896

You are buying a boat from a company that builds custom boats. You would like a boat priced at $60,000 for delivery June 15, 2018. As the company you are buying from operates from an offshore island location, they prefer all payments be in Bitcoin. You negotiate a deal with the company to buy the boat for $6,000 in cash today as a down payment and a payment of 5 Bitcoins in June 2018 when the boat is delivered.

(a) Explain the currency risk you are taking with this contract

(b) Describe (in general) of hedging the risk in the transaction above using (i) a forward contract and (ii) an alternative method of hedging. (Note you can assume standard derivative contracts are available).

(d) Draw a diagram showing the hedge in part (b) using a forward contract. Your diagram should show the range of payoffs from the unhedged position, the hedge instrument and the net position.

Reference no: EM131932896

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