Question
Assume you are the CFO of AIFS. Your analyst reports the following information (Use the following information for the remainder of the assignment): Current exchange
Assume you are the CFO of AIFS. Your analyst reports the following information (Use the following information for the remainder of the assignment):
Current exchange rate is $1.16/.
Forward rate is $1.175/.
Expected final sales volume is 35,000. Worst case scenario is volume 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/.
5. Using the above information
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 use a forward contract to hedge? c) What is the total option premium for each scenario?
6. As the CFO, you decided not to hedge. Assuming expected final sales volume is 35,000, what are your total costs
a) if the exchange rate remains at $1.16/? Lets call this the baseline scenario. b) if the exchange rate will be $1.25/? How does this compare to the baseline case? c) if the exchange rate will be $1.11/? How does this compare to the baseline case?
7. As the CFO, you decided to hedge using forward contracts. Assuming expected final sales volume is 35,000 and forward rate is $1.175/. What are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)
a) if the exchange rate remains at $1.16/? 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 option contracts. What type of option is suitable for this case (call option or put option)? Why?
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