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.