Question: As a reminder, the Royal Dutch Shell is a UK-based oil company that plans to sell oil to its US partner Marathon Petroleum. They agree

As a reminder, the Royal Dutch Shell is a UK-based oil company that plans to sell oil to its US partner Marathon Petroleum. They agree on the 24th of May 2018 that the payment of $500,000 for the sold oil will reach Royal Dutch Shell on 23rd of July 2018. The payment is denominated in USD and on the 24th of May 2018 the Royal Dutch Shell does not know at which exchange rate they will be able to exchange the US dollar payment into British pound on July 23rd, 2018. They fear that the US dollar might depreciate over the nearest future and they decide to hedge against this possibility.

One possibility to hedge against the US dollar depreciation is to sell a forward contract for $500,000 at a forward price of 0.76GBP/USD, with delivery on July 24, 2018. We have already analysed this possibility in the section on forward contracts.

The other solution is to buy a European put option with a strike price of 0.76GBP/USD, exercise time on July 24, 2018 and size of 125,000USD.

We would like you to analyse how the Royal Dutch Shell may hedge against the possibility of the US dollar depreciating with the above put option. Specifically we would like you to:

prepare a relevant table with the option payoff depending on the future exchange rate (take into account

prepare an option payoff profile for the Royal Dutch Shell

We recommend you to use an Excel spreadsheet for the preparation of the table and payoff diagrams.

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