Beta India Limited, an Indian pharma company, is having payables of 10 million Yuan which needs to be settled after 2 months from now for its import orders from China. The CFO of Beta India Limited is worried about the foreign exchange risk involved in the payment of 10 million Yuan after 2 months. The current spot exchange rate is 1Chinese Yuan = 10.75 Indian Rupee.The CFO of Beat India Limited considers the following three strategies.

Strategy A is to use 2-months call options on the Chinese Yuan with strike price of 1Chinese Yuan = 10.95 INR. These are currently selling for Rupee 0.25 each.

Strategy B is to use 2-months put options on the Chinese Yuan with strike price of 1 Chinese Yuan = 10.25 Indian Rupee.The puts are also currently selling for Rupee 0.25 each.

Strategy C is to use 2-months call options on the Chinese Yuan with strike price of 1 Chinese Yuan = 10.95 Indian Rupee ; and also to use 2-months put options on the Chinese Yuan with strike price of 1 Chinese Yuan = 10.25 Indian Rupee.

(a) What is the risk of the spot market for Beta India Limited? If the CFO of Beta India Limited decides to retain the risk of the spot market, explain under which condition the expenditure of Beta India Limited in terms of Indian rupee will decrease. If the CFO of Beta India Limited decides to retain the risk of the spot market, explain under which condition the expenditure of Beta India Limited in terms of Indian rupee will increase?

(b)If the CFO of Beta India Limited decides to hedge the foreign exchange risk of the spot market using Strategy A, explain what position in call options on Chinese Yuan Beta India Limited should acquire. Evaluate the strategy and explain the advantages and disadvantages of the strategy. Show full working.

(c) If the CFO of Beta India Limited decides to hedge the foreign exchange risk of the spot market using Strategy B, explain what position in put options on Chinese Yuan Beta India Limited should acquire. Evaluate the strategy and explain the advantages and disadvantages of the strategy. Show full working.

(d) If the CFO of Beta India Limited decides to hedge the foreign exchange risk of the spot market using Strategy C, explain what positions in put and call options on Chinese Yuan Beta India Limited should acquire. Evaluate the strategy and explain the advantages and disadvantages of the strategy. Show full working.

(e) If the CFO of Beta India Limited desires that Beta India Limited should pay maximumRs. 11 for every Chinese Yuan on after 2 months, explain which strategy you would recommend.