6 Now assume that you have determined that the historical standard deviation of the yen is about

£0.0003. Based on your assessment, you believe it is highly unlikely that the future spot rate will be more than two standard deviations above the expected spot rate by the delivery date. Also assume that the futures price remains at its current level of £0.004608. Based on this expectation of the future spot rate, what is the optimal hedge for the firm?

Blades plc needs to order supplies two months ahead of the delivery date. It is considering an order from a Japanese supplier that requires a payment of 12.5 million yen payable as of the delivery date. Blades has two choices:
l Purchase two call options contracts (since each option contract represents 6 250 000 yen).
l Purchase one futures contract (which represents 12.5 million yen).
The futures price on yen has historically exhibited a slight discount from the existing spot rate. However, the firm would like to use currency options to hedge payables in Japanese yen for transactions two months in advance. Blades would prefer hedging its yen payable position because it is uncomfortable leaving the position open given the historical volatility of the yen.
Nevertheless, the firm would be willing to remain unhedged if the yen becomes more stable someday.