Cs5 Madura

1. Idea of tradeoff is based on decision- higher premium or higher exercise price. If Blades decides to pay no more than 5% above the spot rate, the company should choose £0,00504 option. However, premium on that option now has increased to be worth 2 percent of the exercise price, which is higher than what the company prefers to pay. Alternatively, option of £0,00528 offers premium on level of 1.5% but then, the exercise price is 10% above spot rate- company desires to ensure paying no more than 5 percent above the existing spot rate, which means that this alternative is also not perfect. Either way, Blades will have to sacrifice lower price of premium or lower exercise price.

2.Blades could remain unhedged, however taking into consideration latest volatile movements of yen price, it Gould be wise to hedge its position. Alternatively, Blades can buy future contracts, as their prices have not been affected by movements of yen.

3 The expected future price of contract is equall to 0,004608

4.The optimal choice is to purchase one futures contract. Although remaining unhedged also has the same cost, actual costs incurred on the delivery date to purchase yen may deviate substantially from this value, depending on the movements of the yen during 2 months. This means that, the firm will probably prefer using a futures contract over remaining unhedged.

Unhedged

Expected spot rate 0,004608

Yen 12500000

Cost 57600

Future contract

Future price 0,004608

Yen 12500000

Cost 57600

Options

Option 1 Option 2

Exercise price 0,00504 0,00528

Premium 0,0001 0,0000756

Yen 6250000 6250000

Cost 32125 33472,5 65597,5

5.No, as the yen is very volatile and, therefore, the actual costs incurred may turn out to be lower than the one the firm forecast . Yen may depreciate, changing optimal solution from “future contract” to “remain unhedged”.

6.

St. Dev 0,0003

Expected spot rate 0,004608

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