What are the major risks that AIFS faces?

For the questions below, assume that AIFS hedges currency risk for the projected sales volume of 25,000 (unless otherwise specified). Assume also for simplicity that the spot exchange rate , relevant forward exchange rates, and strike prices (strike exchange rates) are the same.

Suppose AIFS gets 25,000 customers as forecast, and the cost for each customer is 1000 euros.

1. If there is no hedge against currency fluctuations, what will be AIFSs total costs in dollars if the exchange rate remains stable at $1.22/euro?

a. If the dollar depreciates to $1.48/euro?

b. If the dollar appreciates to $1.01/euro?

c. If AIFS hedges 100% with forward contracts, would it buy or sell euros and when should delivery occur? Explain.

d. What would be AIFSs total costs in dollars if the dollar depreciates to $1.48/euro?

e. If the dollar appreciates to $1.01/euro?

2. If AIFS hedges 100% with options, should it buy call options (to buy euros in the future) or put options (to sell euros in the future)? Explain.

3. Suppose the strike price of the option is $1.22/euro (the current exchange rate) and the costs (premiums) of the options are 5% of that amount. What would be AIFSs total costs in dollars if the dollar depreciates to $1.48/euro?

a. If the dollar appreciates to $1.01/euro?

b. Suppose sales volume is 15,000 more than expected at the time the hedging strategy was enacted (40,000).

4. Assuming 100% hedging with forwards, what would be AIFSs total costs in dollars if the dollar depreciates to $1.48/euro?

a. If the dollar appreciates to $1.01/euro?

5. Assuming 100% hedging with options, what would be AIFSs total costs in dollars if the dollar depreciates to $1.48/euro?

a. If the dollar appreciates to $1.01/euro?

6. Suppose sales volume is 15,000 less than expected at the time the hedging strategy was enacted (10,000).

7. Assuming 100% hedging with forwards, what would be AIFSs total costs in dollars if the dollar depreciates to $1.48/euro?

a. If the dollar appreciates to $1.01/euro?

8. Assuming 100% hedging with options, what would be AIFSs total costs in dollars if the dollar depreciates to $1.48/euro?

a. If the dollar appreciates to $1.01/euro?

9. Which hedging strategy would you favor (forwards or options) if sales volume was highly predictable? Explain.

10. Which hedging strategy would you favor (forwards or options) if sales volume was highly unpredictable? Explain.

Answer what you can with info provided and research needed