[10] 5. A U.S. importer will have a net cash outflow of 25 million Japanese yens

Question

[10] 5. A U.S. importer will have a net cash outflow of 25 million Japanese yens for goods bought. The payment date will be late September 2015. On April 20, 2015, the U.S. importer locks in the maximum dollar cost of buying 25 million Japanese yens by buying PHLX calls on yens, with a strike price of yen110/S and an expiration date of October 20, 2015. The option premium on that date is $0.0002/yen. The options are available in multiples of yen 2.5 million. There is a brokerage commission of $50 per option contract The spot rate on the September payment date turns out to belyen100/S The importer can either exercise the call option or sell it at its market value. Assume that he can sell it at $0.0009 per yen if he chooses to do so. What is the actual dollar cost of buying 25 million Japanese yens?

Explanation / Answer

1.Since the Spot rate on September is 100yen/$ , the option will be excersiced as the Option Holder(U S Importer) has the right to buy Yen @ 110Yen/$. He is getting an additional 10yens per dollar.

2.Actual Dollar cost of Buying 25Million Japense Yen is computed as follows:

a.Buying Rate of Yen (1/110) 0.009091$

b.Option Premium per Yen 0.0002$

c.Brokerage Commission per Yen(25 Million Jap Yen/2.5 Million)

(10 Option Contracts*50$)=500$/25Million Japenese Yen 0.00002$

d.Dollar Cost of Buying One Yen (a+b+c) 0.009311$

e.Yens to be Purchased 25Million Yens

f.Total Dollar Cost of Buying (e*f) 2,32,775$

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