SAP (a German company) bought Qualtrics for $8 billion in 2018. The deal was to close in 12 months. The current exchange rate between USD and Euro was $1.185 at the time of the deal. The exchange rate forecast was for Euro to depreciate against the USD, but the exact decline is not known. SAP decided to hedge with derivatives and purchased enough options for USD. The call option with strike price of $1.18 per Euro is selling for the price of $0.005 USD. The put option with strike price of $1.18 is selling for $0.01. Which option should SAP use? What is the profit/loss from the hedge if the exchange rate turns out to be $1.165 in 12 months? What about if the rate is $1.19?

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Choosing the Right Option and Analyzing ProfitLoss Option Selection In this scenario SAP should choo... View the full answer