Six months from today, Apple Inc. is going to (i) receive 8.4 million euros from its retailers in Europe and (ii) pay 52 million Japanese yens to its manufacturers in Japan.  These events will expose the company to foreign exchange rate risk since Apple is domiciled in the U.S. and hence uses U.S. dollar as its home currency (i.e., all foreign currencies will be converted to or from U.S. dollars).

 

1.  Suppose that Apple takes a short position in a forward contract that allows the company to sell 8.4 million euros in six months at a forward exchange rate of 1.0558 U.S. dollars per euro.  Then in six months, the exchange rate becomes 1.0820 U.S. dollars per euro.  How much does Apple gain or lose from this forward contract?
   
     Is what Apple does in part 1 hedging or speculation?  Briefly explain why.
   
    
2. Suppose that Apple takes a short position in a put option (i.e., sell a put option) that gives the buyer of the option the right to sell 52 million Japanese yens in six months at an exchange rate of 127.89 Japanese yens per U.S. dollar (i.e., the exercise or strike price).  Then in six months, the exchange rate becomes 130.29 Japanese yens per U.S. dollar.  
3. 
   
4. How much does Apple gain or lose from this option contract?  Ignore the price Apple received from selling the put option.
   
    
5.  Consider Apple's exposure to Japanese yens in six months and its position in the put option in part. Under what circumstance Apple will not be able to buy the 52 million Japanese yen using the put option contract to pay its Japanese manufacturers.  Is what Apple does in part 3 hedging or speculation?  Briefly Explain why.

Answer rating: 100% (QA)

To calculate Apples gain or loss we need to convert the amounts in euros and Japanese yens to US dollars using the spot exchange rates and then compar... View the full answer