Bedouin Comfort needs to order supplies two months ahead of the delivery date. It is considering an order from a Chinese supplier that requires a payment of 0.5 million yuan payable as of the delivery date. Bedouin Comfort has two choices:

• Purchase two call options contracts (since each option contract represents 250,000 yuan).
• Purchase one futures contract (which represents 0.5 million yuan).

The firm would like to use currency options to hedge payables in Chinese yuan for transactions two months in advance. Bedouin Comfort would prefer hedging its yuan payable position because it is uncomfortable leaving the position open given the historical volatility of the yuan. Jawahar Aldossary, Bedouin Comforts finance director, would like to use an exercise price that is about 5 percent above the existing spot rate to ensure that Bedouin Comfort will have to pay no more than 5 percent above the existing spot rate for a transaction two months beyond its order date.

1.) Should Bedouin Comfort allow its yuan position to be unhedged? Describe the trade-off.

Bedouin Comfort needs to order supplies two months ahead of the delivery date. It is considering an order from a Chinese supplier that requires a payment of 0.5 million yuan payable as of the delivery date. Bedouin Comfort has two choices:

• Purchase two call options contracts (since each option contract represents 250,000 yuan).
• Purchase one futures contract (which represents 0.5 million yuan).

The firm would like to use currency options to hedge payables in Chinese yuan for transactions two months in advance. Bedouin Comfort would prefer hedging its yuan payable position because it is uncomfortable leaving the position open given the historical volatility of the yuan. Juwaher Aldossary, Bedouin Comforts finance director, would like to use an exercise price that is about 5 percent above the existing spot rate to ensure that Bedouin Comfort will have to pay no more than 5 percent above the existing spot rate for a transaction two months beyond its order date. The table below summarizes the option and futures information available to Bedouin Comfort.

Spot rate	0.58 SAR
Option Information:
Exercise price (SAR)	0.61 SAR
Exercise price (% above spot)	5%
Option premium per yuan (SAR)	0.00928 SAR
Option premium (% of exercise price)	1.6%
Futures Contract Information:
Futures price	0.57 SAR

2) Construct a contingency graph for the purchaser of the above call option.