Hedging with urrency Options Angelfire对冲货币期权在所涉.pptVIP

Hedging with Currency Options An American firm has 1,000,000 € payables 3months hence. Today the market rates are: Spot : 1.3825/1.3830; 90day forward swap points: 20/15; 90day $ denominated call options: Premium (p) = 29.50 Strike Price (X) = 138.55 * * Before going into details of the case study we should be careful about the interpretation of the quotations of options. In options market premium and strike price for dollar denominated contracts are given in cents: So in our problem Premium(p) = 29.50 cents i.e. = 0.2950$/100€ Strike Price (X) = 138.55 cents i.e. = 1.3855 $/€ The American firm has three alternatives to deal with the foreign exchange exposure: Open Position; Forward Hedge; Option Hedge; At maturity, assuming spot rate as ST ,under different alternatives the outflow will be: Open Position : 1,000,000 ST Forward Hedge: Forward Rate : 1.3830 – 0.0015 = 1.3815 Outflow = 1,000,000 * 1.3815 = $1,381,500 iii) Options Hedging: Case 1: If ST X Premium : One contract in € involves 10000. So to purchase 1,000,000 €, 100contracts are needed. Premium for 1 contract = 10000 * 0.2950/100 = 29.5$ So for 100 contracts = 100 * 29.5 = 2950$ Premium is paid at Upfront. But Exercising the option may be done after 90days. So assuming 10%p.a interest for 90 days the maturity value of this premium will be: 2950 + 2950 * 90/365 * 10/100 = 3023$(apprx) At maturity two cases may happen: Case 1: If ST X Case 1: If ST X Under Case 1, Option will be exercised and the outflow in Options hedging will be : 1,000,000 * 1.3855 + 3023 = 1,388,523$ Under Case 2, Option will not be exercised and the outflow in Options hedging will be : 1,000,000ST + 3023 in $ So at maturity assuming spot rate ST the outflows under different alternatives are: Open Position : $1,000,000 ST Forward Po