Say that the value of the Chinese Yuan is 7.40 Y per US Dollar, but that it could change in value next year to 8.05 or to 6.86 Y per US $. Let the probability of each value next year be 1/3.
(1) You have a liability of 1 million Yuan next year. Ignoring the initial cost of the futures contract itself, if you buy Yuan forward at 7.40 Y per $ next year, you'll save _______ Dollars if the Yuan appreciates to 6.86 Y per dollar. If you buy this contract and the Yuan depreciates to 8.05 Y per $, you will 'gain' ______ (write as a negative number) by being 'locked into' the futures contract.
(2) Thus your expected (i.e., probability weighted) gain or loss on the contract (ignoring its initial cost) is _______. (Write an expected gain as positive and an expected loss as negative.)
(3) Say that instead of a future, you buy an option to buy Yuan forward at the current rate of 7.40 Y per $. With the same probabilities, and ignoring the contract costs, your expected gain or loss is _____ (Write an expected gain as positive and an expected loss as negative.)