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

Question

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

Quizplus · Accepted Answer

The exporter can buy put options to sell €1,000,000 at the strike price of $1.25/€. The cost is €1,000,000 * $0.0075/€ = $7,500. Since options are in contracts of €62,500, the exporter needs 16 contracts (€1,000,000/€62,500). The total cost is 16 * $0.0075 * €62,500 = $7,500.

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