Apex Corporation must pay its Japanese supplier ¥125 million in three months. It is thinking of buying 20 yen call options (contract size is ¥6.25 million) at a strike price of $0.00800 in order to protect against the risk of a rising yen. The premium is 0.015 cents per yen. Alternatively, Apex could buy 10 three-month yen futures contracts (contract size is ¥12.5 million) at a price of $0.007940/¥. The current spot rate is ¥1 = $0.007823. Apex’s treasurer believes that the most likely value for the yen in 90 days is $0.007900, but the yen could go as high as $0.008400 or as low as $0.007500.

a. Diagram Apex’s gains and losses on the call option position and the futures position within its range of expected prices (see Figure 7.1). Ignore transaction costs and margins.

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b. Calculate what Apex would gain or lose on the option and futures positions if the yen settled at its most likely value.

c. What is Apex’s break-even future spot price on the option contract? On the futures contract?

d. Calculate and diagram the corresponding profit and loss and break-even positions on the futures and options contracts for the sellers of these contracts.


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