You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor Under the terms of the contract, in one year you will deliver 3.700 kilograms of frozen king crab for 106,000 euros Your cost for obtaining the king crab is $105,000 Al cash flows occur in exactly one year a. Plot your profits in one year from the contract as a function of the exchange rate in one year for exchange rates from $0.75/8 to $145/ Label this tine "Unhedged Profits b. Suppose the one-year forward exchange rate b 51257 and that you enter into a forward contract to sell the euros you will receive at this rate In the figure from part(a) plot your combined profits from the crab contract and the forward contract as a function of the exchange rate in one your Label this line "Forward Hedge c. Suppose that instead of using a forward contract, you consider using options A one-year call option to buy euros at a strike price of 51 25/C is trading for 50 12/0 Similarly a one year put option to sell euros at a strike price of $125/e is trading for 50 1276 To hedge the risk of your profits, should you buy or sell the call or the put? d. In the figure from parts (a) and (b) plot your all in" profits using the option hedge (combined profits of crab contract option contract, and option price) as a function of the exchange rate in one year Label this line "Option Hedge (Note You can ignore the effect of interest on the option price e. Suppose that by the end of the year a trade war erupts, leading to a European embargo on US. food products. As a result, your deal is cancelled, and you don't receive the euros or incur the costs of procuring the crab. However, you will have the profits for losses) associated with your forward or options contract in a new figure plot the profits associated with the forward hedge and the options hedge (labeling each ine) When there is a risk of cancellation, which type of hedge has the least downside risk? Explain briefly E UNIVERSO a. Plot your profits in one year from the contract as a function of the exchange rate in one year for exchange rates from 50 757 to $1457Label this tine Unhedged Profito The unhedged profit is. (Select the best choice below) . 49 50 Linhedged. Profit 4.0 linhedged Plott 900 30 500 25 500 20500 19.500 Protein they Pince 9.500 S500 500 ) 500 15 1 ho 10.500 10 20 500 35500 30500 Shuron ne year 30 500 Seuro in one year b. Suppose the one-year forward exchange rate is $125/C and that you enter into a forward contract to sell the euros you will receive at this rate in the figure from portal.plot your combined profits from the crab contract and the forward contract as a function of the exchange rate in one year Label this line Forward Hedge The forward hedged profit is Select the best choice below) OB . 48.500 Unhedged Profit Forward Hedged Profit 33.500 12.500 Linhedged Profit Forward Hedged Profit 39 500 2500 19 500 5500 19 500 500 9.500 500 2006 10 500 3000 20.500 Next 30 500 c. Suppose that instead of using a forward contract, you consider using options. A one year call option to buy euros at a strike price of 51 25/C is trading for $0.127 Similarly a one year put option to sell euros at a strike price of S1257e is trading for $0.1276 To hedge the risk of your profits, should you buy or sell the call or the pur? (Select from the drop-down menus) You want to sell in exchange for Thus, buying put options will protect the price at which you can sed d. In the figure from parts (a) and (b), plot your all inprofits uning the option hodge (combined profits of crab contract option contract, and option price) as a function of the exchange rate in one your Label this line option Hedge." (Note: You can ignore the effect of interest on the option price) The all-in option hodge is (Select the best choice below) OA OB 49 Unhedged Profit Forward Hedged Profit 39.500 Option Hedged so Unhedged Profit Forward Hedged Profit 3500 Option Hedged 200 20500 500 19 500 Profit in one year Proin one year 9.500 9.00 500 cho -10.500 225084 30 500 30 500 Seone year Turn one year e. Suppose that by the end of the year, a trade war erupts, leading to a European embargo on US food products. As a result, your deal is cancelled, and you don't receive th euros or incur the costs of procuring the crab. However, you still have the profits (or losses) associated with your forward or options contract. In a new figure, plot the profits associated with the forward hedge and the options hedge (labeling each line) When there is a risk of cancellation, which type of hedge has the least downside risk? Explain briefly (Select all the choices that apply) A. For the option hedge, you receive a payoff from the put if the value of the euro appreciates. If the euro declines, the put is worthless (and are out the original purchase price of the puts). The profit is max (0.106.000 EX($125-Exchange rate) / ] - $12, 720 With the puts, the maximum loss is their initial cost of $12,720 An advantage of hedging with options is the limited downside risk in the event of cancellation B. For the option hedge, you receive a payoff from the put if the value of the euro declines. If the euro appreciates, the put is worthless (and are out the original purchase price of the puts) The profitis max 10.106.000 CX($125 Exchange rate/ -512.720. With the puts the maximum loss is the initial cost of $12.720. An advantage of hedging with options is the limited downside risk in the event of cancellation C. For the forward hedge, you receive a payoff from the forward the value of the euro appreciates. If the euro declines, you have a loss on your forward position The profit is 106,000 EX($125-Exchange rate the euro declines significantly, the loss from the forward hedge can be very large D. For the forward hedge you receive a payoff from the forward if the value of the euro decines the auto appreciates, you have a loss on your forward position The profit is 106.000 E (5125 - Exchange rate the euro appreciates significantly the loss from the forward hedge can be very large The graph depiction the profit one years (Select the best choice below) OB O 500 48500 48.500 38.500 38.500 2500 28,500 1.500 18.00 Profit in one year Proff in one Year 2.500 500 1 1500- 10 -15.500 Ford of Option Payot -21.00 100 1E300 EGPastot Option Payer 21 500 31500 Ser in -31 500 5/euro in one year