1. You work as a
oker for a US company that imports European foods into the US. You just signed a deal with an Italian producer of premium olive oil. Under the terms of the contract, in three months you will receive 40,000 liters of olive oil in exchange for 100,000 euros. You are going to sell the entire shipment of olive oil to Fresh Foods Markets at $3.2/liter. All cash flows occur in exactly three months
a. Using Excel plot your profits in three months from the deal as a function of the spot exchange rate in three months, for exchange rates from $0.9/€ to $1.35/€ (Spot Exchange rate, $$/1€, on your X-axis, profit in $$ on your Y-axis) . Label this line “Unhedged Profits.”
. Look up cu
ent $$/€ three-month futures exchange rate. Where foreign exchange futures contracts are trading? Use futures exchange rate as a forward exchange rate. Describe how you could hedge the risk of the contract with forward contract. In the figure you used for part a) plot your total expected profits from the olive oil with forward hedge as a function of the exchange rate in three months. Label this line “Forward Hedge.”
c. Suppose that instead of using a forward contract, you consider hedging with options with three months to expiration. Which kind of options (call or put) would you use? Explain, please be specific. How would you hedge your profits from the olive oil deal using option contracts?
You may access €-to-$ options at https:
www.barchart.com/futures/quotes/E6*0/options
Please note that C (P) at the end of the strike indicates type of an option: Call (Put). Also, make sure that you choose the option with the maturity closest to three months from April, the 30th (the due date for the project)
Choose optimal (in the sense of combination of strike price and premium) three-months-to-expiration options that would deliver maximum profit.
d. Compute profits from the deal with the options hedge for spot exchange rate in three months being equal to $0.9/€, $1.1/€, and $1.35/€ (do not disregard option premium/price).
e. In the figure from parts (a) and (b), plot profit profile from the olive oil deal with the options hedge as a function of the exchange rate in three months.
To plot the profit profile use the three exchange rate / profit combinations you computed in d). Label this line “Options Hedge.”
f. Suppose that there is a significant probability that that the deal may fall through and the oil would not be supplied. What would be the profit/loss profiles of the forward and options hedges? Plot them on the new graph
What would be optimal hedge if you are concerned that the deal may fall through? Explain
1.
You
work as a
oker fo
a US company that imports European foods in
to
the US.
You j
ust
signed a deal with an Italian producer of
premium
olive oil
. Under the
terms of the contract, in
three months you will receive 40,000 liters of olive oil in exchange for
100,000 euros
.
You are
going to sell the entire shipment of olive oil to Fresh Foods Market
s
at $3.2
liter.
All cash
flows
occu
in exactly three months
a.
U
sing Excel p
lot your profits i
n three months from the deal
as a function
of the
spot
exchange
ate in three months
, for exch
ange rates from $0.
9
€ to $1.35
€
(
Spot
E
xcha
n
ge rate,
$$/1
€
, on
your X
-
axis,
profit in $$ on your Y
-
axis)
. Label this line “Unhedged Profits.”
.
Look up
cu
ent
$
$
€
three
-
month
f
utures
exchange rate
.
Where foreign exchange f
utures
contracts are trading?
Use futures exchange rate as a forward exchange rate.
Describe how you
could hedge the risk of the contract
with forward contract
. In the figure you used for part a)
plot
your
total expected profits from the olive
oil with f
orward
hedge
as a function
of
the exchange
ate in three months
. Label this line “F
orward
Hedge.”
c.
Suppose that instead of using a forward contract, you co
nsider
hedging
w
ith
options
with three
months to expiration
.
Which
kind of options (call or put) would you use?
Expl
ain
, please be
specific
.
How would you hedge your profits from the olive oil deal using option contrac
ts?
You may ac
cess
€
-
to
-
$ options at
https:
www.barchart.com/futures/quotes/E6*0/options
Please note that C (P) at the end of the strike indicates type of a
n option: Call (Put). Also,
make
sure that you choose the option with the maturity closest to three months from April, the 30
th
(the due date for the pro
ject)
C
hoose
optimal
(in the sense of combination of strike
price and premium)
three
-
months
-
to
-
expiration option
s
that would deliver
maximum profit.
d.
Compute profits from the deal with the options hedge for s
pot
exchange rate in three months
eing equal to $0.
9
€
, $1.1
€
, and $1.35
€
(do not disregard option p
emium/price
)
.
e.
In the figure from parts
(a) and (b), plot
profit profile from the olive oil deal with the options
hedge
as a function
of the exchange rate in three months.
To plot the profit profile use the three exchange rate / profit combinations you
computed in d)
.
Label this line “Option
s
Hedge.
”
f.
Suppose
that the
e is a significant probability th
at t
hat the deal may fall t
hrough
and the oil would
not
e supplied. What would be the profit/loss profiles of the
fo
ward and options hedges
?
Plot
them on
the
new graph
What
would be optimal
hedge
if
you are concerned that the deal may fall through? Expl
ain
1. You work as a
oker for a US company that imports European foods into the US. You just
signed a deal with an Italian producer of premium olive oil. Under the terms of the contract, in
three months you will receive 40,000 liters of olive oil in exchange for 100,000 euros. You are
going to sell the entire shipment of olive oil to Fresh Foods Markets at $3.2/liter. All cash flows
occur in exactly three months
a. Using Excel plot your profits in three months from the deal as a function of the spot exchange
ate in three months, for exchange rates from $0.9/€ to $1.35/€ (Spot Exchange rate, $$/1€, on
your X-axis, profit in $$ on your Y-axis) . Label this line “Unhedged Profits.”
. Look up cu
ent $$/€ three-month futures exchange rate. Where foreign exchange futures
contracts are trading? Use futures exchange rate as a forward exchange rate. Describe how you
could hedge the risk of the contract with forward contract. In the figure you used for part a) plot
your total expected profits from the olive oil with forward hedge as a function of the exchange
ate in three months. Label this line “Forward Hedge.”
c. Suppose that instead of using a forward contract, you consider hedging with options with three
months to expiration. Which kind of options (call or put) would you use? Explain, please be
specific. How would you hedge your profits from the olive oil deal using option contracts?
You may access €-to-$ options at https:
www.barchart.com/futures/quotes/E6*0/options
Please note that C (P) at the end of the strike indicates type of an option: Call (Put). Also, make
sure that you choose the option with the maturity closest to three months from April, the 30
th
(the due date for the project)
Choose optimal (in the sense of combination of strike price and premium) three-months-to-
expiration options that would deliver maximum profit.
d. Compute profits from the deal with the options hedge for spot exchange rate in three months
eing equal to $0.9/€, $1.1/€, and $1.35/€ (do not disregard option premium/price).
e. In the figure from parts (a) and (b), plot profit profile from the olive oil deal with the options
hedge as a function of the exchange rate in three months.
To plot the profit profile use the three exchange rate / profit combinations you computed in d).
Label this line “Options Hedge.”
f. Suppose that there is a significant probability that that the deal may fall through and the oil would
not be supplied. What would be the profit/loss profiles of the forward and options hedges? Plot
them on the new graph
What would be optimal hedge if you are concerned that the deal may fall through? Explain