You have just started working for an Australian company and the Managing Director, Jane, has called upon you for some advice. Jane has informed you that the company expects to receive 100 million Chilean Pesos in 9 months' time for some financial advice provided to the local government of Santiago. Jane is worried about fluctuations in the value of the Australian Dollar between now and when the company receives the 100 million Chilean Pesos in 9 months' time. You have been provided with the following information:

A 9-month futures contract on Chilean Pesos is traded with an exchange rate of 500 (1 Australian Dollar equals 500 Chilean Pesos); and,

A 9-month put option contract on Chilean Pesos is traded with an exchange rate of 500 (1 Australian Dollar equals 500 Chilean Pesos);

 

Required:

Advise Jane how she could completely eliminate the risk of exchange rate fluctuations and lock in an exchange rate of 500.

 Show that the strategy works if the exchange rate increases to 550 (1 Australian Dollar equals 550 Chilean Pesos) or deceases to 450 (1 Australian Dollar equals 450 Chilean Pesos).

Answer rating: 100% (QA)

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