Question
Scenario 2 (Pandemic): the expected volume of US sales in 2020 is 1250 kits Assume, in each scenario, that the average sales price per kit
Scenario 2 (Pandemic): the expected volume of US sales in 2020 is 1250 kits
Assume, in each scenario, that the average sales price per kit is $12.50 and that all sales are realized at the end of December 2020.
Cost of producing each kit = $4.50 US dollars
Shipping cost per kit = $2.75 US dollars
Assume all costs are paid at the end of the year.
The current spot exchange rate is (bid-ask) $0.76/C$ - $0.78/C$ and forward bid-ask is $0.70/C$ - $0.71/C$. For simplicity, assume that (for both call and put) option premium is C$0.025, and option strike price is C$1.295. You are allowed to hedge costs and revenues separately.
The 1-year forecasts for December 2020: bid-ask will be $0.68/C$ - $0.69/C$ if the investors (and speculators) consider the U.S. dollar ($) a safe haven currency during the pandemic.
bid-ask will be $0.81/C$ - $0.82/C$ if the investors (and speculators) consider the Canadian dollar (C$) a safe haven currency during the pandemic
QUESTION
1) Assume that the Scenario 2 (Pandemic) took place in 2020 and the U.S. dollar became a safe haven currency during the pandemic. What are your cash flows (profits) if you
a) do not hedge the exchange rate risk?
b) hedge the exchange rate risk using forward contracts?
c) hedge the exchange rate risk using options contracts?
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