Blades

BLADES, INC. CASE

1. Since Blades Inc. has chosen to use call options to hedge their payables in yen, they should choose to use the exercise price of $0.00756 because it is the lower of the two options. In this case the call option should not be used and the yen position should not be hedged since the recent yen spot rate was $0.0072 and below the exercise price of $0.00756.

2. Looking at the potential fluctuation a speculator would like to take advantage of the yen’s movement over the period of time. They would likely want to sell a future contract at a spot rate of $0.0072 and then purchase at the future price of $0.006912 which would result in a gain of $0.000288($0.0072-$0.006912).

Table for 3&4

(currency USD) | Call Option | Futures Contract |

Premium paid | -$0.0001134 |   |

Cost of shares |   | -$0.0069120 |

Sale of shares |   | $0.0072000 |

Total cost | -$0.0001134 | $0.0002880 |

3. The expectation based on the order date of the yen spot rate by the delivery date would be a premium of paid of $0.0001134 for a call option resulting in -$0.0001134 gain vs. a future contract with the cost of share minus the sale of share which results in $0.000288. Based on this a future contract would be the way to go.

4. From a purely cost basis Blades Inc. would make a profit of $0.000288 by purchasing future contracts.

5. When looking at the calculations a futures contract would be a better strategy for Blades Inc.

(currency USD) | Call Option | Futures Contract |

Premium paid | -$0.0001134 | none |

Cost of shares | -$0.0075600 | -$0.0069120 |

Sale of shares | $0.0082000 | $0.0082000 |

Total Gain | $0.0005266 | $0.0012880 |

6. The optimal solution would be to use the alternative call option which still has a premium of $0.0001134 with an exercise price of $0.00792; however with this option the futures contract information in the table shows that it will have a futures price of $0.006912 and thus making it more attractive an...