Tracero Inc. is a new automobile manufacturer that specializes in electric cars for export to Italy, Switzerland, and England. The company anticipates that its sales for the next six months will follow that which is given in the table below:

Country

Quantity

Price

Revenue

Spot Rate

6-Month Forward Rate

Italy

3,920

41,730

163,581,600

$1.2307/1

$1.2485/1

Switzerland

675

49,094

33,138,450

$1.0485/1

$1.0685/1

England

535

43,132

23,075,620

$1.3840/1

$1.3962/1

1)Calculate the expected total Dollar revenues over the ensuing six-month period?

Tracero's supply chain is globally based for which its total cost structure is shown by the following table:

Country

Cost

Spot Rate

6-Month Forward Rate

Switzerland

66,151,533

$1.0488/1

$1.0685/1

China

27,645,290

6.3346/1$

6.4020/1$

Russia

17,012,486

56.6589/1$

57.7081/1$

Mexico ($)

MP19,139,047

MP18.5887/1$

MP19.1780/1$

France

29,771,851

$1.2307/1

$1.2485/1

Germany

40,404,655

$1.2307/1

$1.2485/1

Finland

10,632,804

$1.2307/1

$1.2485/1

Italy

31,898,412

$1.2307/1

$1.2485/1

2)Calculate the expected total Dollar cost for Tracero over the ensuing six-month period?

Tracero is concerned that sudden exchange rate volatility could pressure operating results and endanger covenants on a debt issue floated two years ago. The company does not want to hedge all revenue and costs but would like to significantly reduce exchange rate volatility and its effects on reported results. The treasurer and CFO of the company have focused their attention on Europe and hence the Euro as the majority of its business is centered in that region of the world. You have been hired to develop a foreign exchange strategy for Tracero which will significantly reduce its overall currency risk and exposure.

3)What is the net Euro exposure?

You are to detail how you would hedge the foreign currency risks stipulated above through multiple strategies which must include:

a)Forward contracts

b)Futures contracts

c)Option contracts

4)Explain the logic of hedging the net Euro exposure instead of gross Euro revenues:

5)Explain why Tracero might find hedging with futures contracts to be less desirable than hedging with a forward contract.

6)Detail the Forward Contract hedging strategy for Tracero

7)Given the following data, detail the hedging strategy using Futures Contracts

Contract: September 2018 Euro Futures Contract @ $1.2496

Size of Contract: 125,000 Euros

8)Given the following data, detail the hedging strategy using Options Contracts

Contract: Euro September $1.25 Puts @ $.0255/Euro

Size: 125,000 Euros

9)If the cost of capital is 11.5675%, what is the cost to Tracero of the option strategy?

10)What are the fundamental differences for Tracero between hedging with forward and futures contracts and hedging with option contracts.

11)What is the break-even spot rate between the forward and option strategies?

12)Give a description of when the use of options may be favored for Tracero as opposed to a forward contract strategy. In addition, give the downside to the use of options.