The Case:

The Question: (Show full work)

It is July 1,2020. You work as an analyst for Elsa Frigorifics in Lake Wobegon, MN. Jorgen Bjorgen, the CEO, has ordered a pair of advanced ice-replicators from Germany. The equipment will cost 140 million, due in Euro, one year from now on July 1, 2021. Jorgen is concerned about the foreign exchange exposure of this upcoming payment. During the last 12 months, currency market volatility has been unusually high, fueled mostly by uncertainty about the potential weakness of the US dollar. If the dollar cost of the equipment ends up being above $170 million the project is not profitable anymore. Diagonal Alley Bank offers the following spot rate and 12 months forward points: in the interbank morket, deaicrs quote forward points os plps (1 plp is cqual to a.ood). To derive the outright forword rate, you necd to add or subtract the appropriate forword points to or from the spot rate. If the forward bid points forward ask points (forward discount), subtroct the forward points from the spot. You look at Bloomberg for interest rates to calculate a money market forward alternative You call Gringotts Bank and ask for a one year 1.1300$/ strike call option to buy 140 million. Gringotts quotes the following one year offer price for you to buy the option: Analyze the following alternative: Gringotts Bank option hedge (1) Evaluate the overall hedged results of this strategy (\$ cost) if the $/ turns out to be 1.01, 1.05,1.09,1.13,1.17,1.21,1.25 noting in what cases the option is exercised or not, and (2) Which exchange rate scenario of the above works out best for Cyberdyne if they hedged with the call option