A corp. is a Korean exporting company and is scheduled to receive US dollars in...
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A corp. is a Korean exporting company and is scheduled to receive US dollars in a year. The current exchange rate is ?(Korean Won) 950 per $(USD) 1. A considers a contract with B bank to hedge the foreign exchange risk. Let S?? denote Korean Won per $1 in a year. In the contract, if 900 < S?? ? 950, A can sell the hedged amount of dollars for ?950 per $1. However, if S?? ? 1000, A has to sell twice of the hedged amount for ?950 per $1. For the other values for S?? the contract is not effective. How can B bank make this contract and what is the condition that makes the initial cost zero? A expects to receive $1 in a year and now likes to hedge the FX risk. Draw the final profit of the contract in ? for A if the hedged amount is $1.
Draw the profit diagrams of the final position (original position + KIKO) for A and also for B.
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