Assume you are the CFO of a company. Your analystreports the following information (Use...

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Accounting

Assume you are the CFO of a company. Your analystreports the following information (Use the following informationfor the remainder of the question):
• Current exchange rate is $1.16/€.
• Forward rate is $1.175/€.
• Expected final sales volume is 35,000. Worst case scenario isvolume of 15,000. Best case scenario is volume of 50,000.
• Cost per student is €2000.
• Option premium is 2% of USD strike price.
• Option strike price is $1.165/€.
1. Using the aboveinformation
a) What is the total projected costs (for all three scenarios)in dollars at the current exchange rate?
b) What are the total costs (for all three scenarios) if you usea forward contract to hedge?
c) What is the total option premium for each scenario?
2. As the CFO, you decided not to hedge.Assuming expected final salesvolume is 35,000, what are your totalcosts
a) if the exchange rate remains at $1.16/€? Let’s call this thebaseline scenario.
b) if the exchange rate will be $1.25/€? How does this compareto the baseline case?
c) if the exchange rate will be $1.11/€? How does this compareto the baseline case?
3. As the CFO, you decided to hedge using forwardcontracts. Assuming expected final sales volume is 35,000 andforward rate is $1.175/€. What are your total benefit/cost and thepercentage benefit/cost from hedging (compared to nohedging)
a) if the exchange rate remains at $1.16/€?
b) if the exchange rate will be $1.25/€?
c) if the exchange rate will be $1.11/€?
4. As the CFO, you decided to hedge using optioncontracts. What type of option is suitable for this case (calloption or put option)? Why?
5. As the CFO, you decided to hedge using optioncontracts. What are your total benefit/cost and the percentagebenefit/cost from hedging (compared to no hedging)
a) if the exchange rate remains at $1.16/€?
b) if the exchange rate will be $1.25/€?
c) if the exchange rate will be $1.11/€?
6. What is the most profitable strategy for expectedfinal sales volume is 35,000 and for the worst-case scenario volumeof 15,000 (no hedge, forward contract, or optioncontract)
a) if the exchange rate remains at $1.16/€?
b) if the exchange rate will be $1.25/€?
c) if the exchange rate will be $1.11/€?
d) What is the overall best strategy? Why?

Answer & Explanation Solved by verified expert

4.3 Ratings (562 Votes)

1 a total projected costs Scenarios Worst case Best case Expected Sales volume 1500000 5000000 3000000 Cost per student in euro 200000 200000 200000 Exchange rate 116 116 116 Cost per student in 172414 172414 172414 Total costs in 2586206897 8620689655 5172413793 b total projected See Answer

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In: AccountingAssume you are the CFO of a company. Your analystreports the following information (Use the...Assume you are the CFO of a company. Your analystreports the following information (Use the following informationfor the remainder of the question):• Current exchange rate is $1.16/€.• Forward rate is $1.175/€.• Expected final sales volume is 35,000. Worst case scenario isvolume of 15,000. Best case scenario is volume of 50,000.• Cost per student is €2000.• Option premium is 2% of USD strike price.• Option strike price is $1.165/€.1. Using the aboveinformationa) What is the total projected costs (for all three scenarios)in dollars at the current exchange rate?b) What are the total costs (for all three scenarios) if you usea forward contract to hedge?c) What is the total option premium for each scenario?2. As the CFO, you decided not to hedge.Assuming expected final salesvolume is 35,000, what are your totalcostsa) if the exchange rate remains at $1.16/€? Let’s call this thebaseline scenario.b) if the exchange rate will be $1.25/€? How does this compareto the baseline case?c) if the exchange rate will be $1.11/€? How does this compareto the baseline case?3. As the CFO, you decided to hedge using forwardcontracts. Assuming expected final sales volume is 35,000 andforward rate is $1.175/€. What are your total benefit/cost and thepercentage benefit/cost from hedging (compared to nohedging)a) if the exchange rate remains at $1.16/€?b) if the exchange rate will be $1.25/€?c) if the exchange rate will be $1.11/€?4. As the CFO, you decided to hedge using optioncontracts. What type of option is suitable for this case (calloption or put option)? Why?5. As the CFO, you decided to hedge using optioncontracts. What are your total benefit/cost and the percentagebenefit/cost from hedging (compared to no hedging)a) if the exchange rate remains at $1.16/€?b) if the exchange rate will be $1.25/€?c) if the exchange rate will be $1.11/€?6. What is the most profitable strategy for expectedfinal sales volume is 35,000 and for the worst-case scenario volumeof 15,000 (no hedge, forward contract, or optioncontract)a) if the exchange rate remains at $1.16/€?b) if the exchange rate will be $1.25/€?c) if the exchange rate will be $1.11/€?d) What is the overall best strategy? Why?