Assume Apple Inc. is expected to make payment to the purchases of phone devices in the euro area worth €6,860,000,000. Given the current environment due to the impact of COVID-19, Apple fears that the expenditure will be adversely affected upon converting to Euro € in the next three months. Therefore, Apple Inc. wishes to hedge to reduce its risk. Based on this scenario, please answer the following questions:

(a) Explain ONE financial risk faced by Apple Inc. related to the payment made in Euro, given the above scenario, why you consider this as a risk, and whether you would consider hedging. In your answer, please discuss the outlook for the underlying variable and cite evidence of an adverse or favorable direction. You need to provide sufficient evidence of research to support your arguments. NB: reference list will not be part of the word count.

(b) For the risk you have mentioned above in part (a) please provide the hedging strategy you will use and explain why you have chosen this strategy above all others.

(c) Irrespective of your answer above, assume you are using an option ‘spread’ strategy to hedge your risk. Please use real data from the CME group and provide the net premium cost of the hedge, the strike prices used, and the number of contracts required. Show all calculations.

Answer rating: 100% (QA)

A The risk is that the euro will appreciate hence higher outflows So we have to find a hedge that pr... View the full answer