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 forward contracts. Assume that the expected final sales volume is 30,000. What are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)

a) if the exchange rate remains at $1.18/?

b) if the exchange rate will be $1.35/?

c) if the exchange rate will be $0.95/? Dr. Ruchith Dissanayake School of Economics and Finance Semester 1, 2020 QUT Business School | QUT 5