Answered step by step
Verified Expert Solution
Question
1 Approved Answer
On 1/1/2020, ABC made a contract with EDF (a French company) to sell them equipment worth Euro 2m which will be shipped during the year
On 1/1/2020, ABC made a contract with EDF (a French company) to sell them equipment worth Euro 2m which will be shipped during the year and paid on 31/12/2020. ABC is an American company that has its financial statements in US$ and has a policy to hedge any FX risk, thus made a forward contract on 1/1/2020 and the forward rate was EUR/US$ 1.14/1.15. On 1/7/2020, EDF informed ABC that it no longer needed the goods and cancelled the contract. a- What could have ABC done from the beginning to protect itself and minimize its loss / risk b- What is the most appropriate course of action that ABC should do to minimize its losses or make a profit from this situation and how much will be ABCs profit / loss? The following data is available for you on 1/7/2020 o Euro call options strike price is 1.20 and premium of 0.01 o Euro put options strike price is 1.19 and premium of 0.01 o Euro/$ 6 months forward rate is 1.20/1.21 o ABCs finance manager strongly believes that the Euro zone is very weak economically and is highly confident that the Euro will weaken to 1.10 before end of 2020.
On 1/1/2020, ABC made a contract with EDF (a French company) to sell them equipment worth Euro 2m which will be shipped during the year and paid on 31/12/2020. ABC is an American company that has its financial statements in US$ and has a policy to hedge any FX risk, thus made a forward contract on 1/1/2020 and the forward rate was EUR/US$ 1.14/1.15.
On 1/7/2020, EDF informed ABC that it no longer needed the goods and cancelled the contract.
a- What could have ABC done from the beginning to protect itself and minimize its loss / risk
b- What is the most appropriate course of action that ABC should do to minimize its losses or make a profit from this situation and how much will be ABCs profit / loss?
The following data is available for you on 1/7/2020
o Euro call options strike price is 1.20 and premium of 0.01
o Euro put options strike price is 1.19 and premium of 0.01
o Euro/$ 6 months forward rate is 1.20/1.21
o ABCs finance manager strongly believes that the Euro zone is very weak economically and is highly confident that the Euro will weaken to 1.10 before end of 2020.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Business Ethics A Stakeholder And Issues Management Approach
Authors: Joseph W. Weiss
7th Edition
1523091541, 978-1523091546
