Blades Inc is under the dilemma of deciding how they are to purchase supplies from a Japanese business ally while they provide proper protection to the asset that they are to use. The agreement is for the company to pay the supplies upon delivery. To do this, the company has a choice of whether to purchase two call options amounting to 6,500,000 yen each or that of one time futures contract at the amount of 12.5 million yen which is the actual price of the materials to be supplied.To make the viable decision, the following questions shall be used as guides for the process: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 exercise price $0.00792? Describe the tradeoff. Basing from the possible increase of yen rate, it is better to use the call option with exercise price of $0.00756 which is at least five percent higher than that of the actual exercise spot. This would allow the entire exercise to gain more in the future giving the company much benefit.2. Should Blades allow its Yen position to be unhedged?
No, with the promising future of an increased futures price for yen, it is expected that the investment placed by Blades through using a call option that is particularly able to consider the possible risks that they may occur, Blades simply assures itself and its stakeholders of the possible advancement available for them to accept from the international exchange market later on.3. ...Given this condition, what is that expectation on the order date of the yen spot rate by the delivery date? As per mentioned in the discussion, if the consideration on speculators is taken into careful attention, it is expected that the spot rate of yen would be at least at $ .0072 after two months of the actual delivery date.
4. Assume that the firm shares the market consensus of the future yen spot rate. Given this expectation and given that the firm makes a decision purely on a cost basis, what would be its optimal choice? Based from the information provided, it is expectedly beneficial for the organization to take into consideration to make a decision on getting a futures contract. This basically binds the current assets of the organization and entails it with the possibility of earning more in the future upon agreement to put its shares in the market in such a position that would best get the primary profit returns and asset protection that the company needs as it faces the challenges of operating in the international market.5. Will the choice you made as to the optimal hedging strategy in question 4 definitely turn out to be the lowest cost alternative in terms of actual costs incurred? Why or why not? Basically, as seen, the choice is not the lowest option. Seeing from the given information, the lowest cost option to take is that of the decision placed on buying an option that would likely cost the company at least $.0001134 only compared to that of the decision on agreeing to a futures contract. However, in terms of benefiting from the market, the chosen strategy is expected to provide a more optimal chance for the company to work further its assets be properly protected as it engages in the international market exchange industries.6. ...Based on this expectation of the future spot rate, what is the optimal hedge for the firm? Using the risk reversal hedging, it could be expected that the time that the organization's spot in connection with the yen's spot rate would remain to be at its best for the lengthened time that it engages in the international exchange procedures. Although the position of the future spot rate may not change as much, it is still believed that the process of profiting from the investment is obvious and certain.