Where X represents the strike exchange rate in USDKRW, the premiums are expressed in KRW (i.e., 6.75 equals KRW 6.75), and the options underlying exchange rate is based on the value of one unit of the USD in terms of the KRW (or USDKRW).

Items a to g are based on the following information. This company would like to hedge by entering some units of the January USDKRW foreign exchange futures contract on October 14. a. What is the KRW change in this companys underlying position (the USD 300 million unearned revenue to be received) from October 14 to December 14? (3 points) b. What is the hedging position of the USDKRW future contracts? (to buy or to sell? how many units?) (2 points)

c. What is the basis of each future contract on October 14? (2 points)

d. What is the total profit or loss on the futures hedging position as of December 14 denominated in the KRW? [Hint: when you mark a future contract to market, always use the future exchange rates maturing on the same day, not the spot exchange rates. Make sure to multiply the profit or loss from each futures contract by the number of future contracts you entered.] (3 points)

e. What is the basis of each future contract on December 14? (2 points)

f. What is the KRW change in this companys overall position from October 14 to December 14? (2 points)

g. Is this hedge by future contracts perfect? (1 point) Why? (1 point)

Items h to j depend on the following information. Instead of using futures contracts, this company would like to purchase currency options to hedge its underlying position.

h. If this company wants to hedge by buying out-of-the-money options, which type of option (USD Calls/KRW Puts or USD Puts/KRW Calls) with what strike rate should this company purchase? (2 points)

i. Calculate the premium paid or received in KRW from hedging using options. (3 points) j. Describe the net cash flows (in KRW) on January 14, 2023, for the overall position of this company by analyzing the following two scenarios: the options are exercised, and the options are not exercised at expiration. (4 points)

Hedging by Currency Derivatives. ( 25 points). Your best friend, Cho-Sang Lee, lives in South Korea and works for SK Innovation, a Korean company that exports electric vehicle batteries to foreign countries. She asks for your advice on currency hedging for their company's foreign operations. So, in this analysis, please consider South Korea as the domestic country and the Korean won (KRW) as the domestic currency. Today is October 14, 2022. The company has unearned revenue of USD 300 million and expects to receive it on January 14, 2023 (we assume this is in 90 days). We assume that the standardized January currency futures and options settle on January 14, 2023, and each USDKRW futures contract is USD 1,000,000. Here is the market information: As of October 14, the USDKRW spot exchange rate is 1406.00, with the quoted three-month futures exchange rate of 1400.00. On December 14 , you discover that the January USDKRW futures is quoted at 1428.00, and the spot rate is 1430.20. Hedging by Currency Derivatives. ( 25 points). Your best friend, Cho-Sang Lee, lives in South Korea and works for SK Innovation, a Korean company that exports electric vehicle batteries to foreign countries. She asks for your advice on currency hedging for their company's foreign operations. So, in this analysis, please consider South Korea as the domestic country and the Korean won (KRW) as the domestic currency. Today is October 14, 2022. The company has unearned revenue of USD 300 million and expects to receive it on January 14, 2023 (we assume this is in 90 days). We assume that the standardized January currency futures and options settle on January 14, 2023, and each USDKRW futures contract is USD 1,000,000. Here is the market information: As of October 14, the USDKRW spot exchange rate is 1406.00, with the quoted three-month futures exchange rate of 1400.00. On December 14 , you discover that the January USDKRW futures is quoted at 1428.00, and the spot rate is 1430.20