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QUESTION THREE (9 marks) Zee Corporation, an importer of new cars, must pay its Japanese supplier 125 million in three months. It is thinking of
QUESTION THREE (9 marks) Zee Corporation, an importer of new cars, must pay its Japanese supplier 125 million in three months. It is thinking of buying 20 yen call options (contract size is 6.25 million) at a strike price of $0.00800 in order to protect against the risk of a rising yen. The premium is 0.015 cents per yen. Alternatively, Zee Corporation could buy 10 three-month yen futures contracts (contract size is 12.5 million) at a price of $0.007940 per yen. The current spot rate is 1=$0.007823. Suppose Zee's treasurer believes that the most likely value for the yen in 90 days is $0.007900, but the yen could go as high as $0.008400 or as low as $0.007500. A Diagram Zee's gains and losses on the call option position and the futures position within its range of expected prices. Ignore transaction costs and margins. (6 marks) B What is Zee's break-even future spot price on the option contract? On the futures contract
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