International Financial Management 6th Edition by Sanjiv Eun, Cheol Resnick, Bruce Sabherwal

Exercise 3

Suppose that Diva chooses to hedge its exposure in yen using the forward contract or the currency option. Assume that you lock in these contracts at the forward price implied by interest rate parity for September 1995. Draw the payoffs to the position at maturity for each alternative with the exchange rate defined in $/¥ × 10,000 units (i.e., the same units as the currency option is quoted). What do you see as the trade-offs between the alternatives