Consider a global manufacturer with production facilities in Europe and the US that is exposed to...

    

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Consider a global manufacturer with production facilities in Europe and the US that is exposed to demand and currency risk. Suppose the unit sales price is €20 in Europe and $20 in the US. Similarly the unit cost is 10 in local currency. There are two states of future (called A and B), each equally likely: (A) US demand is 100, Euro demand is 50, exchange rate is $0.999/ € : (B) US demand is 50, Euro demand is 100, exchange rate is $2.000/ €. (Natural Hedge) Suppose each facility produces and sells locally. That is, each plant produces according to its local demand. Then they sell to their local market. What is the total expected profit in $? Choose the interval where it lies in. Notation: (a,b] means that the number is greater than a, and less than or equal to b. O <=1900 O (1900, 2200] O (2200, 2500] O (2500, 2800] O (2800, 3100] O >3100 (Natural Hedge with Financial Hedge) Now suppose the company combines natural hedge with a future contract. In particular, it sells 500 future euros with $1.50 per euro. That is, it will receive $750 for sure at a cost of €500. What is the total expected profit in $ in this case? O <=1900 O (1900, 2200] O (2200, 2500] O (2500, 2800] O (2800, 3100] O >3100 (Operational Hedge + Financial Hedge) Now suppose in addition to producing everything where it is cheaper, it also buys a future contract. In particular, it sells 500 future euros with $1.50 per euro. That is, it will receive $750 for sure at a cost of €500. What is the total expected profit in $? O <=1900 O (1900, 2200] O (2200, 2500] O (2500, 2800] O (2800, 3100] O >3100 Now define Range of Profits (RF) = Profit under Scenario B - Profit under Scenario A. Which of the following strategies has the lowest RF? Natural hedge Natural hedge + financial hedge O Operational hedge O Operational hedge + financial hedge Consider a global manufacturer with production facilities in Europe and the US that is exposed to demand and currency risk. Suppose the unit sales price is €20 in Europe and $20 in the US. Similarly the unit cost is 10 in local currency. There are two states of future (called A and B), each equally likely: (A) US demand is 100, Euro demand is 50, exchange rate is $0.999/ € : (B) US demand is 50, Euro demand is 100, exchange rate is $2.000/ €. (Natural Hedge) Suppose each facility produces and sells locally. That is, each plant produces according to its local demand. Then they sell to their local market. What is the total expected profit in $? Choose the interval where it lies in. Notation: (a,b] means that the number is greater than a, and less than or equal to b. O <=1900 O (1900, 2200] O (2200, 2500] O (2500, 2800] O (2800, 3100] O >3100 (Natural Hedge with Financial Hedge) Now suppose the company combines natural hedge with a future contract. In particular, it sells 500 future euros with $1.50 per euro. That is, it will receive $750 for sure at a cost of €500. What is the total expected profit in $ in this case? O <=1900 O (1900, 2200] O (2200, 2500] O (2500, 2800] O (2800, 3100] O >3100 (Operational Hedge + Financial Hedge) Now suppose in addition to producing everything where it is cheaper, it also buys a future contract. In particular, it sells 500 future euros with $1.50 per euro. That is, it will receive $750 for sure at a cost of €500. What is the total expected profit in $? O <=1900 O (1900, 2200] O (2200, 2500] O (2500, 2800] O (2800, 3100] O >3100 Now define Range of Profits (RF) = Profit under Scenario B - Profit under Scenario A. Which of the following strategies has the lowest RF? Natural hedge Natural hedge + financial hedge O Operational hedge O Operational hedge + financial hedge

Answer rating: 100% (QA)

In state A the manufacturers revenue is 2000 100 units 20unit Its cost is 500 100 units 5unit Theref... View the full answer