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Porsche faces two important uncertainties regarding its US sales; Porsche doesn't know how many vehicles it will sell in the US and the euro value

Porsche faces two important uncertainties regarding its US sales; Porsche doesn't know how many vehicles it will sell in the US and the euro value of those sales will depend on the exchange rate.

- Consider 3 scenarios regarding US sales: (1) expected volume of 32,750 vehicles, (2) a worst-case scenario 30% below this expectation, and (3) a best-case scenario 30% higher than this expectation.

- Consider 3 scenarios regarding the exchange rate: (1) an expected scenario equal to the current spot rate of S0 $/ = $1.47/ or S0 /$ 0.68/$, (2) a worst-case scenario for the dollar that is 20% belowthis expectation, and (3) a best-case scenario that is 25% higher than this expectation.

Suppose average US sales price is $90,000 with costs of 40,000 per vehicle. Forecast next year's euro operating margin (revenues - expenses) across a 3x3 matrix with the exchange rate on one dimension and volume on the other. Based on this, characterize how Porsche's euro operating cash flows from US sales depend on the exchange rate under each of the following hedging policies.

a. Porsche does not hedge its currency exposure.

b. Porsche hedges next year's expected sales with a US dollar forward contract.

c. Porsche hedges next year's expected sales with an at-the-money European option on US dollars.

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