Hedging with Straddles (See the chapter appendix.) Brooks, Inc., imports wood from Morocco. The Moroccan exporter invoices these products in Moroccan dirham. The current exchange rate of the dirham is $0.10. Brooks just purchased wood for 2 million dirham and should pay for the wood in three months. It is also possible that Brooks will receive 4 million dirham in three months from the sale of refinished wood in Morocco. Brooks is currently in negotiations with a Moroccan importer about the refinished wood. If the negotiations are successful, Brooks will receive the 4 million dirham in three months for a net cash inflow of 2 million dirham. The following option information is available:
Call option premium on Moroccan dirham = $0.003.
Put option premium on Moroccan dirham = $0.002.
Call and put option strike price = $0.098.
One option contract represents 500,000 dirham.
Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*
*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.