Apex Corporation must pay its Japanese supplier ¥125 million in three months. It isthinking of buying 20 yen call options (contract size is ¥6.25 million) at a strike price of$0.00800 in order to protect against the risk of a rising yen. The premium is $0.00015per yen. Alternatively, Apex could buy 10 three-month yen futures contracts (contractsize is ¥12.5 million) at a price of $0.007940 per yen. The current spot rate is¥1 =$0.007823. Suppose Apex’s treasurer believes that the most likely value for the yen in90 days is $0.007900, but the yen could go as high as $0.008400 or as low as $0.007500.
(a) Calculate Apex’s gains and losses on the call option position and the futures position assuming that the future spot rate will be at: i) the strike price, ii) theminimum forecasted value, iii) the maximum forecasted value, iv) the most likelyforecasted value, and (v) the futures agreed-on price. Ignore transaction costs andmargins.
(b) What is Apex’s breakeven future spot price on the option contract? On the futurescontract?
(c) Calculate Apex’s cash flows on the unhedged position at the five future spot priceslisted in question a).
(d) Diagram the total cash flows on the unhedged position and the futures position(Graph 1) and the total cash flows on the unhedged position and the call optionposition (Graph 2) at the five future spot prices listed in question a). Plot futurespot prices on the x-axis and total cash flows on the y-axis. Indicate profits andlosses on the hedged position on the diagram.
(e) Apex is very confused about the findings above and decides to hire you as a FXconsultant. What FX strategy would you recommend? Justify your answer.