Help with all parts.
1. You work as a broker for a US company that imports European foods into the US. You just signed a deal with an Italian producer of premium olive oil. Under the terms of the contract, in three months you will receive 40,000 liters of olive oil in exchange for 100,000 euros. You are going to sell the entire shipment of olive oil to Fresh Foods Markets at $3.2/liter. All cash flows occur in exactly three months a. Using Excel plot your profits in three months from the deal as a function of the spot exchange rate in three months, for exchange rates from $0.9/€ to $1.35/€ (Spot Exchange rate, $$/1€, on your X-axis, profit in $$ on your Y-axis) . Label this line “Unhedged Profits.” b. Look up current $$/€ three-month futures exchange rate. Where foreign exchange futures contracts are trading? Use futures exchange rate as a forward exchange rate. Describe how you could hedge the risk of the contract with forward contract. In the figure you used for part a) plot your total expected profits from the olive oil with forward hedge as a function of the exchange rate in three months. Label this line “Forward Hedge.” c. Suppose that instead of using a forward contract, you consider hedging with options with three months to expiration. Which kind of options (call or put) would you use? Explain, please be specific. How would you hedge your profits from the olive oil deal using option contracts? You may access €-to-$ options at https://www.barchart.com/futures/quotes/E6*0/options Please note that C (P) at the end of the strike indicates type of an option: Call (Put). Also, make sure that you choose the option with the maturity closest to three months from April, the 30th (the due date for the project) Choose optimal (in the sense of combination of strike price and premium) three-months-to-expiration options that would deliver maximum profit. d. Compute profits from the deal with the options hedge for spot exchange rate in three months being equal to $0.9/€, $1.1/€, and $1.35/€ (do not disregard option premium/price). e. In the figure from parts (a) and (b), plot profit profile from the olive oil deal with the options hedge as a function of the exchange rate in three months. To plot the profit profile use the three exchange rate / profit combinations you computed in d). Label this line “Options Hedge.” f. Suppose that there is a significant probability that that the deal may fall through and the oil would not be supplied. What would be the profit/loss profiles of the forward and options hedges? Plot them on the new graph What would be optimal hedge if you are concerned that the deal may fall through? Explain 1. You work as a broker fo r a US company that imports European foods in to the US. You j ust signed a deal with an Italian producer of premium olive oil . Under the terms of the contract, in three months you will receive 40,000 liters of olive oil in exchange for 100,000 euros . You are going to sell the entire shipment of olive oil to Fresh Foods Market s at $3.2 /liter. All cash flows occur in exactly three months a. U sing Excel p lot your profits i n three months from the deal as a function of the spot exchange rate in three months , for exch ange rates from $0. 9 /€ to $1.35 /€ ( Spot E xcha n ge rate, $$/1 € , on your X - axis, profit in $$ on your Y - axis) . Label this line “Unhedged Profits.” b. Look up current $ $ /€ three - month f utures exchange rate . Where foreign exchange f utures contracts are trading? Use futures exchange rate as a forward exchange rate. Describe how you could hedge the risk of the contract with forward contract . In the figure you used for part a) plot your total expected profits from the olive oil with f orward hedge as a function of the exchange rate in three months . Label this line “F orward Hedge.” c. Suppose that instead of using a forward contract, you co nsider hedging w ith options with three months to expiration . Which kind of options (call or put) would you use? Expl ain , please be specific . How would you hedge your profits from the olive oil deal using option contrac ts? You may ac cess € - to - $ options at https://www.barchart.com/futures/quotes/E6*0/options Please note that C (P) at the end of the strike indicates type of a n option: Call (Put). Also, make sure that you choose the option with the maturity closest to three months from April, the 30 th (the due date for the pro ject) C hoose optimal (in the sense of combination of strike price and premium) three - months - to - expiration option s that would deliver maximum profit. d. Compute profits from the deal with the options hedge for s pot exchange rate in three months being equal to $0. 9 / € , $1.1/ € , and $1.35/ € (do not disregard option pr emium/price ) . e. In the figure from parts (a) and (b), plot profit profile from the olive oil deal with the options hedge as a function of the exchange rate in three months. To plot the profit profile use the three exchange rate / profit combinations you computed in d) . Label this line “Option s Hedge. ” f. Suppose that the re is a significant probability th at t hat the deal may fall t hrough and the oil would not be supplied. What would be the profit/loss profiles of the fo rward and options hedges ? Plot them on the new graph What would be optimal hedge if you are concerned that the deal may fall through? Expl ain 1. You work as a broker for a US company that imports European foods into the US. You just signed a deal with an Italian producer of premium olive oil. Under the terms of the contract, in three months you will receive 40,000 liters of olive oil in exchange for 100,000 euros. You are going to sell the entire shipment of olive oil to Fresh Foods Markets at $3.2/liter. All cash flows occur in exactly three months a. Using Excel plot your profits in three months from the deal as a function of the spot exchange rate in three months, for exchange rates from $0.9/€ to $1.35/€ (Spot Exchange rate, $$/1€, on your X-axis, profit in $$ on your Y-axis) . Label this line “Unhedged Profits.” b. Look up current $$/€ three-month futures exchange rate. Where foreign exchange futures contracts are trading? Use futures exchange rate as a forward exchange rate. Describe how you could hedge the risk of the contract with forward contract. In the figure you used for part a) plot your total expected profits from the olive oil with forward hedge as a function of the exchange rate in three months. Label this line “Forward Hedge.” c. Suppose that instead of using a forward contract, you consider hedging with options with three months to expiration. Which kind of options (call or put) would you use? Explain, please be specific. How would you hedge your profits from the olive oil deal using option contracts? You may access €-to-$ options at https://www.barchart.com/futures/quotes/E6*0/options Please note that C (P) at the end of the strike indicates type of an option: Call (Put). Also, make sure that you choose the option with the maturity closest to three months from April, the 30 th (the due date for the project) Choose optimal (in the sense of combination of strike price and premium) three-months-to- expiration options that would deliver maximum profit. d. Compute profits from the deal with the options hedge for spot exchange rate in three months being equal to $0.9/€, $1.1/€, and $1.35/€ (do not disregard option premium/price). e. In the figure from parts (a) and (b), plot profit profile from the olive oil deal with the options hedge as a function of the exchange rate in three months. To plot the profit profile use the three exchange rate / profit combinations you computed in d). Label this line “Options Hedge.” f. Suppose that there is a significant probability that that the deal may fall through and the oil would not be supplied. What would be the profit/loss profiles of the forward and options hedges? Plot them on the new graph What would be optimal hedge if you are concerned that the deal may fall through? Explain