11. Consider an extension of the Exercise 21 from Chapter 7 concerned with the management of transactions
Question:
11. Consider an extension of the Exercise 21 from Chapter 7 concerned with the management of transactions exposure. The Smedley Company sold products to a Japanese client for f15,000,000. Payment is due six months later. Relevant data are as follows:
Spot exchange rate: f105/$
Japanese borrowing interest rate: 9.0%
U.S. borrowing interest rate: 7.0%
Japanese lending interest rate: 7.0%
U.S. lending interest rate: 5.0%
There exist currency call and put options with the following terms:
Size of options contracts: f1,000,000 Term to expiration of options contracts: six months Exercise price of put and call: $0.009/f Put premium: $0.00001/f Call premium: $0.0001/f Brokerage cost per options contract: $50 Discuss the implications associated with each of the options-based methods for managing the transactions exposure risk associated with this extension of credit.
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