Hedging helicopter exports with collars. Eurocopter—the European defense contractor—exports 25 single-engine light helicopters known as Ecureuil (squirrel)

to the Japanese Coast Guard with payment to be made in six months in the amount of ¥50 billion. Concerned with the high volatility of the €/¥ exchange rate relationship, Eurocopter is considering the use of a ¥ put option at the strike price of ¥108 = €1 at a premium cost of 2 percent.

a. Explain how a put option allows Eurocopter to hedge its ¥ exposure. What is the cost of the hedge, and when is it incurred?

b. Show graphically the € proceeds in six months as a function of the ¥ price of one € at payment time.

c. To neutralize the cost of buying a put option, Eurocopter decides to sell a ¥

call option at the strike price of ¥100 = €1 for a premium exactly matching the cost of the put option. Show graphically the € export proceeds over the range of ¥75 to ¥110 = €1.

d. How would a forward contract at the rate of ¥108 = €1 compare with a ¥ put option or a collar?

e. At what exchange rate would € proceeds be the same under a forward or put option hedge?