Suppose that you are part of the Management team at BusBoard. Suppose that it is the end of December 2019 and a novel coronavirus that causes a respiratory illness was identified and reported to the World Health Organization. There is heightened uncertainty around the World. You (as part of the management team) are reviewing BusBoards hedging strategy for the calendar year 2020.

Assume that BusBoards management considers two scenarios: Scenario 1 (Expected): The expected volume of U.S. sales in 2020 is 2,500 Junior Genius Kits. Scenario 2 (Pandemic): The low-sales scenario is 50% lower than the expected sales volume. 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.

All supply (materials to produce the kits) costs for producing Junior Genius Kits to be sold in the U.S. in 2020 are billed in U.S. dollars from the South Korean supplier and the cost is $4.50 per kit. Shipping costs are also in U.S. dollars and the cost is $ 2.75 per kit. 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 $0.70/C$ - $0.71/C$. The option premium is C$0.025, and option strike price is C$1.295. You are allowed to hedge costs and revenues separately.

Your finance team has made the following 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

5. 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?