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

jeff jeffy answered 1 year ago

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