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 the exercise price of $0.00792? Describe the tradeoff.

2. Should Blades allow its yen position to be unhedged? Describe the tradeoff.

3. Assume that some speculators attempt to capitalize on their expectation of the yen’s movement over the two months between the order and delivery dates by either buying or selling yen futures now and buying or selling yen at the future spot rate. Given this information, what is the expectation regarding the order date of the yen spot rate by the delivery date? (Your answer should consist of one number.)

4. Assume that the firm shares the market consensus regarding the future yen spot rate. Given this expectation and given that the firm makes a decision (that is, option, futures contract, or remain unhedged) purely on a cost basis, what would be its optimal choice?

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? 

6. Now assume that you have determined that the historical standard deviation of the yen is about $0.0005. Based on your assessment, you believe it is highly unlikely that the future spot rate will be more than two standard deviations above the expected spot rate by the delivery date. Also assume that the futures price remains at its current level of $0.006912. Based on this expectation of the future spot rate, what is the optimal hedge for the firm?