A large U.S. drug company, Pharmco, has 100 million yen coming due in one year. Currently the yen is worth $0.01. Because the value of the yen in U.S. dollars in one year is unknown, the value of this 100 million yen in U.S. dollars is highly uncertain. To hedge its risk, Pharmco is thinking of buying one-year put options on the yen with an exercise price of $0.008. For example, if the yen falls in value a year from now to $0.007, the owner of the put receives $0.001. The price of such a put is $0.00007. Show how the dollar value of Pharmco’s receipts and hedging expenses depends on the number of puts purchased and the final $/yen exchange rate. Assume final exchange rates between 0.006 $/yen and 0.015 $/yen are possible.
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