Problem: Dundr, Inc. an American firm, has receiveded an order from a Japanese firm for machinery priced at Yen100,000,000. This amount will be received by Dundr in three months. The following additional information is available (in addition to ft.com exchange rate quotes for April 9)
| Expected spot rate in 3 months (Yen/$) |
|
117.00 |
|
|
|
|
|
|
$ |
Yen |
| Three-month investment interest rate (per annum) |
5.300% |
0.500% |
| Three-month borrowing rate (investment rate + 1%) |
6.800% |
2.000% |
| Options on Yen: |
|
|
|
Call Option |
Put Option |
| Strike price, Yen |
|
|
|
120.00 |
120.00 |
| Option premium (percent) |
|
|
2.000% |
1.400% |
| Amount Receivable in three months (Yen) |
|
|
100,000,000.00 |
| Current spot rate (Yen/$) |
|
|
|
119.2700 |
| Three month forward rate (Yen/$) |
|
|
117.8790 |
Compare the following alternatives with respect to $s to be received in 3 months and risk:
a. Remain Unhedged
b. Forward market hedge
c. Money market hedge - all revelant alternatives including comparison to the forward market hedge.
d. Options market hedge - worst case and if the spot rate in 3 months is Yen116/$.