Part 2 - Bauer College of Business
Part 2
It is now November 6th and the Parts were delivered October 11th. Payment due November 11th
Spot Rate
.008985 USD/JPY
Forward Rates
1 month - .0089845
3 month - .008985
U.S. Int. Rates: < 2 months
Deposit Rate: .2909
Borrowing Rate: .3165
CME Dec. Futures
.008987
PHLX Dec JPY Options – Nov.
JPY Dec Calls Puts
.0096 .00055 .00668
.0098 .00030 .00843
.0100 .00015 .10288
PHLX Dec JPY Options – June
JPY Dec Calls Puts
.0096 .07009 .04308
.0098 .05978 .05261
.0100 .05058 .06325
OTC JPY Options – Exp. Nov. 17
Strike Price Calls Puts
.0096 .06562 .03921
.0098 .05521 .04866
Effective Total Cost in USD if we had advised…
1) 3-month Forward Contract
2) Using December Futures
3) Left the Position Open
4) Using the OTC JPY Option
5) Using PHLX JPY Dec Options
Effective Cost of Using 3-Month Forward
June 6th => Sept 6th
3-Month Forward:
200M JPY x .008985 = $1,797,000
Sept 6th => Dec 6th - Rollover 3 Month Forward
200M JPY x .008985 = $1,797,000
Using 3-month forward contracts between June and September and then rolling it over again the cost is a zero sum and is the perfect hedge.
June 6th => Sept 6th
3-Month Forward:
200M JPY x .008985 = $1,797,000
Sept 6th => Oct 6th - 1 Month Forward Contract
200M JPY x .0089845 = $1,796,900 USD
Oct 6th => Nov. 6th - Rollover 1 Month Forward Contract
200M JPY x .0089845 = $1,796,900 USD
The difference in USD we would have to pay ultimately is:
$1,797,000 - $1,796,900 = $100 in costs
Effective Cost of Using December Futures
Dec. Futures (Nov. Info) – 200M JPY x .008987 = $1,797,400 USD
Dec. Futures (June Info) – 200M JPY x .009873 = $1,974,600 USD
Nov. Spot Rate – 200M JPY x .008985 = $1,797,000 USD
Dec Futures (Nov. Info) vs. Nov. Spot Rate:
$1,797,400 - $1,797,000 = $400 USD in Costs
Dec Futures (Nov. Info) vs. Dec. Futures (June Info):
$1,974,600 USD - $1,797,400 USD = $177,200 USD in Costs
Using the December Futures given to us in November or June is not a cost effective hedging tool. Compared to the November Rate the December Futures given to us in November would cost an extra $400 of USD in order to hedge the 200M JPY. If you compared the December Futures given to us in June and November you would see there is a $177,200 of extra USD we would pay to hedge the 200M JPY.
Effective Cost of Leaving Position Open
(200M JPY * .009829) – (200M JPY * .008985)
= 1,952,800 – 1,797,000 = ($168,800) USD Costs
If we let the exchange rates take their course we would be better off waiting to convert the funds in November rather than June because the Spot Rate is more favorable in November vs. June.
Effective Cost of Using OTC JPY Option
OTC JPY Options – Exp. Nov 17
Strike Price Calls Puts
.0096 .06562 .03921
.0098 .05521 .04866
We assume we bought the call back in June with the Strike Price of .0096. Since the Spot Rate is favorable compared to the Strike Price we shouldn’t exercise the call. So our costs would be the premium of buying the call back in June but not exercising the option.
200M JPY * .06562 = 13,124,000/100 = ($131,240) USD Costs
Effective Cost of Using JPY Dec Option
PHLX Dec JPY Options – From Nov.
JPY Dec Calls Puts
.0096 .00055 .00668
.0098 .00030 .00843
.0100 .00015 .10288
PHLX Dec JPY Options – From June
JPY Dec Calls Puts
.0096 .07009 .04308
.0098 .05978 .05261
.0100 .05058 .06325
We still assume we buy a call option at the .0096 in June. Since in both cases we wouldn't exercise the option since the Spot Rate is more favorable than the Strike Price we would compare the 2 premiums we pay for not exercising the calls in June and November.
June Premium
200M JPY * .07009 = $14,018,000/100 = ($140,180) USD Costs
November Premium
200M JPY * .00055 = ($110,000) USD Costs
If we used the Dec. option in November instead of June we would have saved $40,180 in premium payments.
$140,180 - $ 110,000 = $40,180
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