Question

Suppose you are running several Starbucks stores and planning to import 10 sets of tables and chairs from a Chinese manufacturer in half a year from now. The payment would be denominated in Yuan. One set of tables and chairs is marked as ¥4000.

1. Check the spot exchange rate of ¥/$ today (at the date you are doing your assignment), and estimate the trend of the exchange rate in 6 months, and write up an option contract.
2. Make sure to specify the strike price, and the price of the call option. Also, analyze the potential loss and gain in $ amount under two different scenarios:

• Option contract is to be exercised
• Option contract expires

Answer 1

Solution:-

Given that

Suppose you are running several Starbucks stores and planning to import 10 sets of tables and chairs from a Chinese manufacturer in half a year from now. The payment would be denominated in Yuan. One set of tables and chairs is marked as ¥4000.

1) Spot Exchange Rate of ¥/$ TODAY = 1$ = ¥ 7.09

2) Estimated trend of exchange rate in 6 months = 1$ = ¥ 7.355

3) 6 month Call option Contract at Strike Price of 1$ = ¥ 7.45 estimated

4) Call Option Price = $ 3000

5) Gain OR Loss Under two different scenarios :-

A) If option Contract Expires Exercise:

10 Sets of tables and chairs imported, Price payable

= ¥ 4,000 *10

= ¥40,000

Converted into $ at estimated Exchange rate 1$ = ¥ 7.355

= ¥40,000 /¥ 7.355

= $ 5,438.47

B) If Option Exercised:

Amount Payable = ¥40,000 / ¥ 7.45

= $ 5,369.13

C) Gain by opting for option contract

= A) - B)

= $ 5,438.47 - $ 5,369.13

= $ 69.34