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. What is the most profitable strategy for the case in which the expected final sales volume is 30,000 (no hedge, forward contract, or option contract)
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/€?
d) Is there a best strategy? Why? Note that you only need to provide a few sentences about which strategy to use from no hedge, forward contract, or option contract strategies.
Solutions
Expert Solution
There is no one best strategy, it usually depends on your expectation on how the ticker moves. You could buy an option and usually end up with a decent hedge provided the premium is not too expensive.
Good Luck
jeff jeffy answered 2 years agoRelated Solutions
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...
In accordance with the unbiased forward rate condition in determining the exchange rate, the current forward...
In accordance with the unbiased forward rate condition in
determining the exchange rate, the current forward rate can be used
as a ____________.
Multiple Choice
condition where the spot rate is expected to remain constant
over a period of time.
condition where a future spot rate is equal to the current spot
rate.
predictor of the future spot rate at the equivalent point in
time.
relationship between the future spot rates of two currencies at
an equivalent point in time....
The current exchange rate is 1.50 $/€, and 3-month forward exchange rate is 1.55 $/€. The...
The current exchange rate is 1.50 $/€, and 3-month forward
exchange rate is 1.55 $/€. The 3-month interest rate in US is 5%,
and the 3-month interest rate in France is 3%. Assume you are a
trade who demands 1 million Euro in 3 months.
2. Please explain the foreign exchange rate risk that you face. (no
more than 100 words)
3. Please describe how to use the forward contract to hedge the
risk. (no more than 100 words)
4....
Suppose that the current spot exchange rate is $1.25/€ and the 1-year forward exchange rate is...
Suppose that the current spot exchange rate is $1.25/€ and the
1-year forward exchange rate is $1.20/€. The 1-year interest rate
is 2.00 percent per annum in the United States and 5.00 percent per
annum in France. Assume that you can borrow up to $1,000,000 or
€800,000. Calculate your arbitrage profit in €.
Suppose that the current exchange rate is SF1.25/$ and three month forward exchange rate is SF1.30/$....
Suppose that the current exchange
rate is SF1.25/$ and three month forward exchange rate is SF1.30/$.
The three-month interest rate is 4 percent per
annum in United States and 8 percent per
annum in Switzerland. Assume that you can borrow up to
$1,000,000 or SF 1,250,000.
a) Is Interest Rate Parity
holding?
b) If your answer to part a is no,
how would you realize a certain profit via a covered interest
arbitrage? Also determine the size of the arbitrage...
Suppose that the current exchange rate is SF1.25/$ and three month forward exchange rate is SF1.30/$....
Suppose that the current exchange
rate is SF1.25/$ and three month forward exchange rate is SF1.30/$.
The three-month interest rate is 4 percent per
annum in United States and 8 percent per
annum in Switzerland. Assume that you can borrow up to
$1,000,000 or SF 1,250,000.
a) Is Interest Rate Parity
holding?
b) If your answer to part a is no,
how would you realize a certain profit via a covered interest
arbitrage? Also determine the size of the arbitrage...
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You are...
The current spot exchange rate is $1.55/€ and the three-month
forward rate is $1.50/€. You are selling €1,000 forward for $. How
much in $ are you receiving in three months? If the spot exchange
rate is $1.60/€ in three months, how much is the gain or loss from
this forward hedge?
Suppose that the current spot rate is €0.80/$ and the 3-month forward exchange rate is €0.7813/$....
Suppose that the current spot rate is €0.80/$ and the 3-month
forward exchange rate is €0.7813/$. The 3-month interest rate is
4.6% per annum in the U.S. and 4.4% per annum in France. Assume
that you can borrow up to $1,000,000 or €800,000. Show how to
realize a certain profit without taking any risk, assuming that you
want to realize profit in terms of $. Also determine the size of
your profit.
The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based on...
The current spot exchange rate is $1.45/€ and the three-month
forward rate is $1.55/€. Based on your economic forecast, you are
pretty confident that the spot exchange rate will be $1.50/€ in
three months. Assume that you would like to buy or sell
€100,000.
a) List and discuss what actions would you take to speculate in
the forward market (take a short or long position and why)
b) Critically discuss what is the expected dollar profit from
speculation
c) If...
The current spot exchange rate is $1.70/£ and the three-month forward rate is $1.71/£. You believe...
The current spot exchange rate is $1.70/£ and the three-month
forward rate is $1.71/£. You believe that the spot exchange rate
will be $1.69/£ in three months.
(1) What actions do you need to take to speculate in the forward
market? What is the expected dollar profit from speculation? Assume
that you would like to buy or sell £1,000,000 forward.
(2) What is your dollar profit if the spot exchange rate turns
out to be $1.79/£ in three months?
(3)...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- C++ C++ Write a definition for a structure type for records for CDs. The record contains...
- Research Question: Does the spatial ability differ by biological sex? (Use Data A) Null Hypothesis: Spatial...
- Write a method speedingTicket() that decides whether a driver should be given a ticket from a...
- Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at...
- 7. In order to improve the network performance and security, ACLs is recommended. Please explain what...
- Noting that there has been an increasing interest in organic foodstuffs with increasing affluence, Mr Tommy...
- 1. the physical sites at which crossing over occurs are the.... A. chiasmata B. Centrioles C....
ADVERTISEMENT