Assume you are the CFO of AIFS. Your analyst reports the following information (Use the following...

90.2K

Verified Solution

Question

Finance

Assume you are the CFO of AIFS. Your analyst reports thefollowing information (Use the following information for theremainder of the assignment):
Current exchange rate is $1.16/€.
Forward rate is $1.185/€.
Expected final sales volume is 30,000. Worst case scenario isvolume of 10,000. Best
case scenario is volume of 36,000.
Cost per student is €2500.
Option premium is 2% of USD strike price.
Option strike price is $1.165/€.
6. As the CFO, you decided to hedge using forward contracts.Assume that the expected final sales volume is 30,000. What areyour total benefit/cost and the percentage benefit/cost fromhedging (compared to no hedging)
a) if the exchange rate remains at $1.16/€? b) if the exchangerate will be $1.25/€?
c) if the exchange rate will be $1.08/€?
7. As the CFO, you decided to hedge using option contracts.Assuming expected final sales volume is 30,000, what are your totalbenefit/cost and the percentage benefit/cost from hedging (comparedto 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 $1.08/€?
8. What is the most profitable strategy for the case in whichthe expected final sales volume is 30,000 (no hedge, forwardcontract, or option contract)
a) if the exchange rate remains at $1.16/€? b) if the exchangerate will be $1.25/€?
c) if the exchange rate will be $1.08/€?
d) Is there a best strategy? Why?

Answer & Explanation Solved by verified expert

4.0 Ratings (758 Votes)

Use spreadsheet for the ease See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Assume you are the CFO of AIFS. Your analyst reports thefollowing information (Use the following information for theremainder of the assignment):Current exchange rate is $1.16/€.Forward rate is $1.185/€.Expected final sales volume is 30,000. Worst case scenario isvolume of 10,000. Bestcase scenario is volume of 36,000.Cost per student is €2500.Option premium is 2% of USD strike price.Option strike price is $1.165/€.6. As the CFO, you decided to hedge using forward contracts.Assume that the expected final sales volume is 30,000. What areyour total benefit/cost and the percentage benefit/cost fromhedging (compared to no hedging)a) if the exchange rate remains at $1.16/€? b) if the exchangerate will be $1.25/€?c) if the exchange rate will be $1.08/€?7. As the CFO, you decided to hedge using option contracts.Assuming expected final sales volume is 30,000, what are your totalbenefit/cost and the percentage benefit/cost from hedging (comparedto 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 $1.08/€?8. What is the most profitable strategy for the case in whichthe expected final sales volume is 30,000 (no hedge, forwardcontract, or option contract)a) if the exchange rate remains at $1.16/€? b) if the exchangerate will be $1.25/€?c) if the exchange rate will be $1.08/€?d) Is there a best strategy? Why?