Consider an extension of the Exercise 21 from Chapter 8 concerned with the management of transactions exposure. The Smedley Company sold products to a Japanese client for ¥15,000,000. Payment is due six months later. Relevant data are as follows:

Spot exchange rate: ¥105/$
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: ¥1,000,000
Term to expiration of options contracts: six months
Exercise price of put and call: \($0.009\)/¥
Put premium: \($0.00001\)/¥
Call premium: \($0.0001\)/¥
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.

Extension of the Exercise 21

Size of futures contracts: ¥1,000,000
Term to settlement of contracts: six months
Transactions cost on ¥15,000,000 forward contract: \($500\)
Discuss the implications associated with each of the non-options - based methods for
managing the transactions exposure risk associated with this extension of credit.