Question

Question 3 A Japanese EXPORTER has a €1,200,000 receivable due in one year. Estimate the cost today of an options strategy that will eliminate the exchange rate risk. Calls S0.0075 per S0.008 per ¥100 Puts $0.008 per $0.006 per ¥100 Listed Options Euro (E62,500) Yen (&12,500,000) Strike $1.25-€1.00 $1.00-¥ 100 $18,600 $21,000 $21,600 $18,000

Answer 1

The exporter has receivables in Euro

He would want to convert euro into yen

Hence, he would sell Yen for Dollars and Buy Yen for Dollars

Sell euro i.e. put option, cost = 1,200,000*0.008 = $9,600

Buy Yen i.e. call option = 150,000,000*0.008/100 = $12,000

Hence, cost of eliminating exchange rate risk = $21,600