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Case Study - Blades Inc

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The solution has the case studu of Blades Inc relating to the yen outstanding and the hedging techniques

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Blades Inc

1. As an analyst for Blades, you have been asked to offer insight on how to hedge. Use a spreadsheet to support your analysis of questions 4 and 6.

1. If Blades uses call options to hedge its yen payables, should it use the call option with the exercise price of $0.00756 or the call option with the exercise price of $0.00792? Describe the tradeoff.

The tradeoff is based on the exercise price and the option premium. If the exercise price is $0.00756, then the option premium is .0001512 and if the exercise price is 0.00792, then the option premium is .0001134.
We have to look at the total cost to get the best alternative. The total cost is the exercise price plus the option premium.
The total cost of the options are:

$0.00756+0.0001512 = 0.007712
$0.00792+0.0001134 = 0.0080034
Even after the event, the option with the exercise price of $0.00756 is a better option.

2. Should Blades allow its yen position to be unhedged? Describe the tradeoff.

Leaving the position unhedged, exposes the firm to exchange rate risk. The trade off is the savings on option premium.
Whether Blades should remain unhedged ...

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