Problem:
Artman Corporation owes 250 million yen to its supplier in 3 months. Artman could hedge its exposure by buying call options at the strike price $0.01050/yen. The premium for this option is 0.015 cents per yen.
Artman could also hedge by buying three months yen futures at a price of $0.01064/yen. The current spot rate Yen1=$0.010. Artman treasurer believes that the most likely value for the yen in 90 days is $0.01041, but the yen could go as high as $0.01087 or as low as $0.00980.
Required:
Question 1: Calculate what Artman would gain or lose on the option and futures positions if the yen settled at its most likely value.
Question 2: What is Artman's break-even future spot price on the option contract? On the futures contract?
Note: Provide support for your rationale.