Ch.5 Blades Case - Shaun [email protected] FIN 4613 Blades...

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Shaun Lanshe @00717301 10/13/09 FIN 4613: Blades, Inc. Case Ch.5 : Currency Derivatives 1. If Blades used call options to hedge its yen payables, due to the historical discount of the yen futures price against the existing spot rate, it would be most reasonable to purchase the call option with an exercise price of $0.00792 versus $0.00756. As the forward rate is less than the spot rate, it indicates that the yen is expected to devalue relative to the dollar in the future. The option will not be exercised if the yen does not appreciate and make the payable more costly for the US firm. And since, the firm expects the value of the yen to depreciate, it is only hedging to protect from the currency’s historic volatility. Since, the firm simply wants the hedge as contingency protection, it should select the option that has the lower premium so as to limit sunk costs if the expected scenario of no exercise occurs. The call option with an exercise price of $0.00792 has a total premium of $1,417.50 for the two call option contracts (12.5 million yen value), while, the call option with an exercise price of $0.00756 has a total premium of $1,890. However, the future yen value breakeven
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