week 3 case discussions

week 3 case discussions - 1. I f Blades uses call options...

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1. If Blades uses call options to hedge its yen payables, should it use the call option with the exercise price of $0.00756 or the call option with the exercise price of $0.00792? Describe the tradeoff. Although the premium on the option has increased to be worth 2 percent of the exercise price, the option on the exercise price should be considered if blades wants to ensure panting no more that 5 percent above the spot rate. Firm has an option to of paying lower premium by purchasing the alternative option with an exercise price of $0.00792, but on the other hand this exercise price is 10% above the existing spot rate. Hence this alternative option is unsuccessful in achieving firms goal of not paying more then 5% above the existing spot rate. This scenario puts firm to make a hard decision whether firm is to continue to use option by paying higher premium than it prefers or by limiting the effectiveness of the hedging by paying higher exercise price. Here if the firm decides to use an option, firm has to pay the premium of $1,417.5 to limit the payables amount
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week 3 case discussions - 1. I f Blades uses call options...

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