Question

In: Finance

Details Current exchange rate is $1.18/€. Forward rate is $1.192/€. Expected final sales volume is 30,000....

Details

  • Current exchange rate is $1.18/€.
  • Forward rate is $1.192/€.
  • Expected final sales volume is 30,000. Worst case scenario is volume of 20,000. Best
    case scenario is volume of 40,000.
  • Cost per student is €2500.
  • Option premium is 1.2% of USD strike price.
  • Option strike price is $1.176/€

Q. As the CFO, you decided to hedge using option contracts. Assuming expected final sales volume is 30,000, what are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)

a) if the exchange rate remains at $1.18/€?

b) if the exchange rate will be $1.35/€?

c) if the exchange rate will be $0.95/€?

Solutions

Expert Solution

*The pay off if not hedged is calculated as

Sales * per student cost * The exchange rate as given in the question-

**The payoff from option is calculated as

(Max(option strike price - exchange rate,0) - (option premium*Exhange rate)*sales volume* Per student cost

All the other formulated are clear in the excel itself.

Hope it helps, Please let me know in the comments section in case of any problem


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