Forwards and options hedging, abenomics 3 arrows.

  Question 1 (15 marks) Space Exploration Plc is seeking to construct a space station near Mars, the planet with the highest level of radiation. Gold will be used to lubricate the station's mechanical parts, conduct electricity and coat the insides of the space station vehicles to protect people inside from infrared radiation and heat. The requirement is to purchase 1,000 ounces of pure gold from Real Rinto, a major gold producer in Australia. The parties have signed a supply contract at USD 1,300 per oz., with payment to be made in British pounds in three months' time. The exchange rate was set at GBP1 = USD 1.2500. However, contract completion is subject to approval by the relevant authorities, the outcome to be known in 2 months' time. Real Rinto needs to hedge the foreign gold exposure because of the increasing volatility of the pound post-Brexit. Required: a. Real Rinto seeks your help to advise if it should use the gold futures contract or options on the gold futures contract to hedge its position. Provide your reasoned recommendation to the company. (10 marks) (Options contract is the answer) b. Real Rinto has obtained the forward rate bid/offer quote of Australian dollars per pound, GBP1.7200/50 for settlement in 3 months. Compute the local receipt to Real Rinto if it uses the forward market hedge, and discuss the advantages and disadvantage of this method. (5 marks) (Please use GBP 1.72) The Japanese yen weakened from approximately USD1 = JPY 100 on 26 September 2016 to approximately JPY114 on 7 December 2016 and sparked a stock market rally on the Tokyo Stock Exchange. However, depending on the weak yen to boost profits of corporate Japan may do more ham than good for Japan's economy in the longer term.     Critically evaluate the last sentence of the preceding paragraph with regards to Abenomics' three arrows, Japanese exporters, importers and Japanese domestic firms in general.