What has a business owner agreed to do when she purchases one Yen contract to se
ID: 2732845 • Letter: W
Question
What has a business owner agreed to do when she purchases one Yen contract to sell Yen in May (the size of the contract calls for ¥125,000)? How would they get out of this obligation if they had to? This will most likely be transacted in the Forward, Futures Market, or the Options Market and why? What would be the difference? If in the Options Market, what is the name of this contract? Is the owner likely the exporter or importer? If the premium is 0.2 cents, what will this cost the buyer? When would the owner make money, breakeven, and lose money on this contract? What would the writer of this contract receive? Be specific!Explanation / Answer
1. She has entered in a Forward contract to sell Yen.
2. She can get out of this obligation by taking an opposite position i.e. by purchasing yen.
3. Most likely this will be transacted in the forward market because original contract belongs to forward market.
4. Forward Market: It is applicable for those contract which are entered today for buying and selling of currency at some future date at the forward rate.
Future and Option Contract: F&O contact are entered today for buying and selling at some future date. However, there is one major difference between future and option contract. In future contract, both the contracting parties must fulfill his or her contract, performance and obligation is must. But under option, only one party is required to fulfill his or her contract, the other party may or may not exercise the contract.
5. If it in the option market, its name would be Put Option Contract.
6. Exporter
7. 02 cents * Yen125000 = $250
8. If yen appreciates = make money, if yen remaines stable = breakeven, if yen depreciate = loose money.
9. Writer of this contract will recieve option premium.
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