KUI PLCs CFO has participated in a top-level managers workshop on derivatives, which took place in North California in April 2020. The CFO is excited about the planned expansion program to the African markets and understands that the options derivative market provides a hedging strategy for both the exports of the MNC as well as the imports of the readily available cheap supplies from the continent. One such strategy to be employed to hedge against the risk of losses associated with exports and accounts receivables is the put option. This is an option to sell, and would enable KUI PLC CFO to lock a rate to sell forex when receivables are due. Of course, she would be required to pay a premium, usually accounted for as a sunk cost, for the option. The other strategy available would be used to hedge against losses associated with imports and accounts payables. In this case, KUI PLC CFO would negotiate a call option to buy forex equivalent to the amounts to be paid. As is the case with a put option, the CFO would have to pay a premium for the call option, which again is accounted for with the call option costs because it is a sunk cost to the entity.

Required

1. A quantitative/numerical illustration with THREE possible outcomes to show how KUI CFO would hedge against losses associated with receivables. Show all your workings including when the put option is exercisable or otherwise. Indicate when the put option is in the money, out of the money, and at the money as well.

ii) A quantitative/numerical illustration with THREE possible outcomes to show how KUI CFO would hedge against losses associated with payables. Show all your workings including when the call option is exercisable or otherwise. Indicate when the call option is in the money, out of the money, and at the money as well.