Please answer #1-#3. I can do them in separate questions if you would like

BUSFIN 4255 International Finance Spring 2017 Semester Foreign Exchange Hedging Exercise Due at Start of Class, Friday, March 24th The Porsche case will handed out in class. Porsche elects to hedge foreign exchange risk up to three years forward using options. Exhibit 2 of the case shows the high level currency hedge exposures Porsche had as of the end of July 2006 and 2007. Assume the figures reported for 2007 consist of the following: Currency Hedge Assets (~12 billion) are puts giving the right to put USD and receive EUR. The puts have a strike price of 0.6897/$ (equal to spot rate) and an average term of 2-years. This is equal to $1.45/. 2-Year deposit rates in Germany are 4.5% and in the USA 5.5%. The annualized volatility of $/ is 10%. 1. Use the European Option Pricing model to estimate the total premium paid on 12 billion of put options. Be sure to calibrate the pricing model using the above parameters. 2. Again use the model to estimate the potential MTM change of this 12 billion portfolio of put options assuming the $/ exchange rate can vary from $1.25/ to $1.65/ in $0.10/ increments. Converted to /$ this is 0.8000, 0.7407, 0.6897, 0.6452, 0.6061. 3. Compare the option premium and simulated MTM to foreign sales figure of 3,940 in 2007. Assume this is all in USD ($5.713 billion at spot price of $1.45/) and represents the full exposure (no need to net local expenses). Determine how much FX risk Porsche has to this exposure by using the same variation in FX prices used in step #2. Opine whether or not the hedge is about right, too large or too small relative to USA sales. 4. Compare the simulated MTM to the 2007 Capital Allocated to Shareholders figure of 8.671 billion for 2007 as shown in Appendix A. Opine whether or not the hedge produces an immaterial, moderate or significant potential impact on the shareholder value of the company. 5. Consider and discuss other possible hedging strategies, including other financial strategies, operational strategies (such as BMW) or product pricing strategies (for example, if their products are relatively price elastic or inelastic, could you adjust price to hedge FX). Review the remaining part of the case, including Porsche's prospective takeover of VW. Based upon the discussion, including the profits derived from hedging vs. core operations, opine: 6. What should shareholders think about the sustainability of Porsche's income given the hedging activities? If you were a stock analyst how would you convey Porsche's currency and VW hedging activities to shareholders? This exercise should fit into a presentation of 6 or less pages. Please keep your responses short and pointed. Be sure to include a cover page with the class time and names of all students on the team. Recalibrated to PUT USD Euro Sales Currency Spot USD Sales Currency $/ Currency /$ Simulated EUR USD Conversion Risk Currency $/ Put Option Price (1Yr) Euro Notional Simulated Option MV Change in Option MV Change in Option MV USD Conversion Risk Net Hedge Effect BASE CASE 2,000 1.45 $ 2,900 1.35 1.45 0.7407 0.6897 2,148 2,000 148 0 1.25 0.8000 1.25 1.35 0.02200179 6,000 6,000 132 - 117 $ - 117 148 $ 31 1.45 0.04146 6,000 249 0 0 0 1.55 0.6452 1.55 1.65 0.6061 1.65 THIS MODEL IS CALIBRATED FOR VALUATION IN EUROS USE THESE /$ SPOT RATES TO SOLVE THE PORSCHE CASE Currency $/ Currency /$ 1.25 0.8000 1.35 0.7407 EUROPEAN FX OPTION PRICING MODEL - VALUATIONS in Spot Rate(e.g. EUR) = 0.6897 Spot Rate(FX USD)= 1.0000 Euro Interest Rate = 4.500% Exercise Price = Days to Expiration = 0.6897 (1/1.45) 730 d1 = (z-score) -0.0640 d2 = (z-score) -0.2054 Call Option Premium = 0.0296 To simulate price of USD Put expressed in EUR terms replace the /$ spot price in the orange highlighted cell. 1.45 0.6897 1.55 0.6452 1.65 0.6061 VALUATIONS in EUROs Forward Rate(e.g. EUR) = 0.6766 Forward Rate (FX USD) = 1.0000 Foreign Interest Rate = 5.500% Option Volatility = 10.000% Years to Expiration (T) = 2.0000 N(d1) = (conditional probability) 0.4745 N(d2) = (cumulative probability) 0.4186 Put Option Premium = 0.0415