The Grandinetti Company is an Italian shoemaker that sells bespoke shoes in the United States. The firm sells its shoes in US Dollars but must convert Dollar revenues to Euros and must pay taxes in Italy based on Euro pretax profits. Grandinetti expects to sell $10,000$ shoes for $$500$ a pair next year. However, there is uncertainty regarding the Euro$/$Dollar exchange rate next year as follows.

Probability Euro$/$Dollar

$10\%0\mathrm{.}50/$ $$1\mathrm{.}00$

$50\%0\mathrm{.}80/$ $$1\mathrm{.}00$

$40\%1\mathrm{.}00/$ $$1\mathrm{.}00$

Grandinetti must pay taxes of $35\%$ on its Euro profits exceeding $3,000,000.$ Currently, Grandinetti is considering a $1$ year forward contract with a forward exchange rate of $0\mathrm{.}85/$ $$1\mathrm{.}00$ to hedge against exchange rate fluctuations. Should Grandinetti hedge? If so$,$ what position should the company take on with the forward contract, and what would be the value gained next year by hedging?

Assume revenues are equal to pretax income.

Group of answer choices

Grandinetti should not hedge since it does not add any shareholder value.

Grandinetti should enter a forward contract to short $$5,000,000$ for $4,250,000.$ Compared to not hedging, their expected profit next year will be greater by $750,000.$

Grandinetti should enter a forward contract to short $5,000,000$ for $$4,250,000.$ Compared to not hedging, their expected profit next year will be greater by $17,500.$

Grandinetti should enter a forward contract to short $$5,000,000$ for $4,250,000.$ Compared to not hedging, their expected profit next year will be greater by $17,500.$