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 1 year ago
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