A U.S. company is to sign a contract for 16 million HK dollars (HKD) that will be paid shortly in the future. Given the current exchange rate of HKD4.0 per U.S. dollar, this amount is consistent with


A U.S. union is to memorial a compress for 16 darling HK dollars (HKD) that gain be hired shortly in the advenient. Given the present remodel objurgate of HKD4.0 per U.S. dollar, this quantity is compatible after a while the union’s target of 4 darling U.S. dollars for its services. Assume it is July and that the compress quantity gain be hired on 30 September. The aftercited September liberty quotes are succorful in the trade today to succor hedge opposing remodel objurgate risk:  

  • A fawn liberty after a while a collide of HKD4.03 at a bonus of HKD0.02
  • A put liberty after a while a collide of HKD4.03 at a bonus of HKD0.01

Note that the liberty bonuss are quoted in remodel objurgate stipulations. The bulk of each liberty compress is for 1,000,000 HKD. The table of directors of the union has requested that you exculpation the aftercited questions: 

a) Which liberty and lie should be used in this hedging temporization? Using min or max notation, what is the payoff and benefit-service office of the preferred liberty? (5 marks)

b) How multifarious liberty compresss should the union buy or dispose-of? (3 marks) 

c) What is the consume of this hedging temporization in U.S. dollar stipulations? (4 marks) 

d) Assume it is now September and the compress is hired as expected. What is the net money glide involution of this compress to the union, turgid the HK dollar either appreciates to HKD3.5 or depreciates to HKD4.5 per U.S. dollar? Show all money glides (in U.S. dollar stipulations) as well-behaved-behaved as the application of the hedge in farsighted the net money glide for twain scenarios. (10 marks) 

e) Using an pattern, spectry a argue why an arbitrage convenience could adhere in the trade? 

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