5. Your company is concerned about the current volatility of UDS vs. peso exchange rate and plans to repatriate 8 million peso per quarter to the US. Your boss ask you to find out the possibility to hedge the down side risk (depreciation of peso against USD) for peso in the foreign exchange market. You did some search online and found the following information.
The current spot price S0 = $0.0501/peso Forecast market fluctuation range for peso $0.053-0.047 per peso
3-mo. call option X=$0.04955/peso, put option X= $0.04821/peso 500,000 peso per contract @ premium $0.000025/peso
3-mo. future contract @ $0.05049/peso and 500,000 peso per contract. Do you need put or call option? How many future contracts or option contracts you would need? Do you need over/under hedged?
6. Based on information you found (above), please draw a contingency diagram for both option and future contracts. What is the break-even price for each type of contract respectively? How much USD would you have received with option and future contract respectively?
7. What are the max. or min. you would have received if future spot market fluctuation between $0.053-0.047 per peso with option or future contract respectively? Please explain to your boss about advantages and disadvantages for option and future with your contingence diagram.