Brooks, Inc. imports lumber from Morocco. The Moroccan exporter invoices in dirhams, its national currency. The current exchange rate of the dirham is 0.10 Dollars. Brooks just bought wood worth 2 million dirhams and You must pay it within three months. It is also possible that Brooks receives 4 million dirhams within three months for the sale of refined wood in Morocco. The company is currently negotiating with a Moroccan importer regarding the refined wood. If the negotiations are successful, Brooks will receive the 4 million of dirhams within three months for a net cash inflow of 2 millions of dirhams.

The following information about options is available:

Call option premium over dirhams = $0.003

Premium of the put option on dirhams = $0.002

Execution price of call and put options = $0.098

An option contract represents 500,000 dirhams.

Describe how Brooks could use a straddle to cover his possible position in dirhams. Consider three scenarios: In the first, the spot exchange rate of the dirham to Option expiration equals the strike price of $0.098. In it second the dirham depreciates to $0.08. In the third, it appreciates at $0.11 dollars.

In each scenario, consider the case in which the negotiations are successful and in the otherwise when negotiations fail. Evaluate straddle effectiveness long in each of these situations by comparing with a strategy You use long call options as a hedge.