A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail a strategy using options that will eliminate exchange rate risk. $$\begin{array} { l l l l }
\hline \text { Listed Options } & & & \
& \text { Strike } & \text { Puts } & \text { Calls } \
\hline \text { Euro } € 62,500 & \$ 1.25 = € 1.00 & \$ 0.0075 \text { per } € & \$ 0.01 \text { per } € \
\hline \text { Yen } ¥ 12,500,000 & \$ 1.00 = \pm 100 & \$ 0.0075 \text { per } ¥ 100 & \$ 0.01 \text { per } ¥ 100 \
\hline
\end{array}$$

Question

A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail a strategy using options that will eliminate exchange rate risk. $$\begin{array} { l l l l } 
\hline \text { Listed Options } & & & \
& \text { Strike } & \text { Puts } & \text { Calls } \
\hline \text { Euro } € 62,500 & \$ 1.25 = € 1.00 & \$ 0.0075 \text { per } € & \$ 0.01 \text { per } € \
\hline \text { Yen } ¥ 12,500,000 & \$ 1.00 = \pm 100 & \$ 0.0075 \text { per } ¥ 100 & \$ 0.01 \text { per } ¥ 100 \
\hline
\end{array}$$

Quizplus · Accepted Answer

To eliminate exchange rate risk, the Japanese exporter can buy put options on euro (to protect against euro depreciation) and buy call options on yen (to protect against yen appreciation). 
From the given data, we can calculate that the exporter needs to buy 16 put options on euro, with a total cost of $0.0075 x 62,500 x 16 = $7,500, to protect against euro depreciation. 
To protect against yen appreciation, the exporter can buy 10 call options on yen, with a total cost of $0.01 x 12,500,000 x 10 = $1,250,000. 
This strategy will completely eliminate exchange rate risk for the Japanese exporter. 
Therefore, the correct answer is option B.

A Japanese EXPORTER Has a €1,000,000 Receivable Due in One