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You are the treasurer of Montana Corp. and must decide how to hedge (if at all)...

You are the treasurer of Montana Corp. and must decide how to hedge (if at all) future payables of 1 million Japanese yen 90 days from now. Call options are available with a premium of $.0004 per unit and an exercise price of $.01040 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is $0.01043 with probability 30%, $0.01042 with probability 25%, $0.01039 with probability 25%, and $0.01038 with probability 20%. What is the probability that the call option will be exercised? What is the estimated dollar cash outflows of currency call hedge?

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IF ANY QUERY, FEEL FREE TO ASK IN COMMENTS Solution:- a. Probability when call option exercised. Probability = = Sum of proba

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