Merton Electronics Coorporation Case Analysis

Call and Put

The combination of the 2 method had the advantages of flexibility but at a cost. They can move to put option when is streghten but only pay the initial cost should the dolar's strenghten. The initial cost would be the combination of the 2 option (Call + Put). Assuming thtat they are paid in march

Initial payment call opt = (300,000,000/100)*0.0249 = $74,700

Initial payment put opt = (300,000,000/100)*0.0105 = $ 31,500

Initial cost = $106,200

This way merton can buy yen at predetermined (0,7852/100yen)price, and should the Yen strenghten there would be no added cost and when the dolar strenghten they can sell it at the predetermined price (0,78/100 yen). The margin should only be $2,355,600 - $2,340,000 = $15,600

Call-Put and Currency Future

the combination of the 3 would be more flexible and immune to risk than the other option buat at a cost and additional contract cost. According to previous calculation there should be at least 24 contracts (300millions/12,5millons). So the contract fee's are $36000. There are also the initial cost for each calls and puts, the calculation are shown in the figure below:

The highlighted area are the possible recomendation relative to the circumstance of the exchange rate overseas. As of for the year starting 1996 the global economic happens and the dollars is strenghtening enormously, the recomendation are to take the optimist dollar value that is 0,780/100 yen strike price.

Conclusion

There are no correct and wrong hedge option for the company, the decision made should be according to the exchange rate of the money at the moment. Theresaid according to the trend at the time. The dollar value is going to keep going upward so the best possible recomendation are to take the one that shows the most optimist dollar value.