The question is in the form of story and it is related to currency FX rate and option Calls/puts. There are 4 problem which need to be answered.Hope this helps.

Module 3 Mini-Case

"Hey, I Just Sold a Ton of Tractors!"

You are the new CFO of Agri-Drone, a manufacturer of a very innovative set of agricultural machines that operate without a driver. By using a combination of computerized mapping augmented with precise GPS links and software, the machines are capable of operating 24 hours a day, with refueling being the only interruption. The agribusiness market is buzzing about them.

It's Thursday morning, and you see Jim, one of your top-performing salespersons, sprint down the hall to tell his boss, the VP of Sales, that he just shook hands on a deal to sell 2O tractors priced at $30,000 each and also 10 combines that sell for $50,000 each. This $1.1 million order is the biggest in Agri-Drone's short history. Not to mention, it was the company's first overseas sale. Your quick mental math tells you that Agri-Drone's cost of goods sold on this deal will be $715,000, and a full allocation of operating costs would total another $220,000 of costs against the sale.

"Not bad," you think to yourself.

You join Jim and Lois, VP of sales, as Jim is explaining that the customer is an immense farming co-op in France, and the terms of the transaction are for Agri-Drone to be paid in Euros upon delivery, which is promised for six months from today. Jim goes on to say that the French customer suggested a conversion rate for the Euros, which Jim admits he has agreed to.

"Excuse me," you exclaim, "What exchange rate did you actually agree to?"

"We agreed to 1.35. It seemed to make the customer happy. Plus, I remember seeing on the Travel Channel that recent conversion rates were about 1.3-something-or -other, so that sounded good to me."

"Actually, it's closer to 1.30 today."

"Hey, that's close enough, right?"

You just shake your head.

"Here's the deal you have to live with"

News of the huge order gets to Stephanie Majors, your CEO, pretty quickly, and she wants to know the details. Your first objective is to show her a side-by-side comparison assuming standard pricing versus the contract pricing as converted into today's USD.

Problem 1

Assuming the EUR/USD exchange ratio is 1.30 today, what do you show the CEO? Demonstrate you calculations below. The space expands as you type.

"Here's what happens if we do nothing else..."

As your meeting with Stephanie continues, you want to demonstrate what happens to the deal's profitability if, in six months, the EUR/USD exchange ratio ends up actually being 1.25, 1.30 and 1.35.

Problem 2

What is the range of actual profit indicated using these exchange rate estimates? Please demonstrate.

"...And here's what happens if we do something"

Just as you expect, Stephanie begins to show concern, and you tell her there's a simple way to protect the Company from additional currency risk between now and six months from now.

Assume the following facts:

Current EUR/USD spot rate -

1.30

6 mo. forward contract pricing

-0.0100

Call strike 1.3000 premium $0.0235

Put strike 1.3000 premium $0.0235

Problem 3

Based on these facts, what would you recommend doing?

Problem 4

For the method chosen, show the CEO what the revenues and profitability would be assuming the EUR/USD exchange rate actually turned out to be 1.25, 1.30 and 1.35 in six months. Demonstrate your calculations.

Please answer by all Problem 4