What would your optimal strategy be if future spot rate

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Reference no: EM131609788

Assume that you have agree to make a transaction in 90 days that will cost 500,000 Yen. Assume that the current spot rate is 150 Yen per US Dollar and that the expected spot rate in 90 days is 170 Yen per US dollar. Assume further that expectations of future spots are, on average correct, with a contract can be purchased to exercise a striking price of 165 yen per dollar in 90 days. Show how the inclusion of the options market necessarily changes the effective distribution of the expected future spot rate. What must be true of risk preferences for individuals who choose to complete the transaction using the future spot rate without buying the option versus the group that buys the option? If you bought the option, what would your optimal strategy be if the future spot rate turned out to be 160 yen per US dollar?

Reference no: EM131609788

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