^{Sumito, a Japanese exporter, wishes to hedge its $15 million in dollar receivables coming due in 60 days. In order to reduce its net cost of hedging to zero, however, Sumito sells a 60-day dollar call option for $15 million with a strike price of 98/$ and uses the premium of $314,000 to buy a 60-day $15 million put option at a strike price of 90/$.}

^{a. Graph the payoff on Sumito's hedged position over the range 80/$-110/$. What risk is Sumito subjecting itself to with this option hedge? (4 marks)}

^{b. What is the net yen value of Sumito's option hedged position at the following future spot rates: 85/$, 95/$, and 105/$? (3 marks)}

^{c. As an alternative to using options, Sumito could have hedged with a 60-day forward contract at a price of 97/$. What would be the yen value of Sumito's hedged receivable if it had used a forward contract to hedge? (3 marks)}

^{d. At what exchange rate will the hedged value of Sumito's dollar receivables be the same whether it used the option hedge or forward hedge? (2 marks)}