Scenario 1 (Expected): The expected volume of U.S. sales in 2020 is 2,500 Junior Genius Kits.Scenario 2 (Pandemic): The low-sales scenario is 50% lower than the expected sales volume.

Assume, in each scenario, that the average sales price per kit is $12.50 and thatall sales are realized at the end of December 2020.

All supply (materials to produce the kits) costs for producingJunior Genius Kitsto be sold in the U.S. in 2020 are billed in U.S. dollars from the South Korean supplier and the cost is $4.50 per kit. Shipping costs are also in U.S. dollars and the cost is $ 2.75 per kit. Assume all costs are paid at the end of the year.

The current spot exchange rate is (bid-ask) $0.76/C$ - $0.78/C$ and forward bid-ask is $0.70/C$ - $0.71/C$. The option premium is C$0.025, and option strike price is C$1.295. You are allowed to hedge costs and revenues separately.

Your finance team has made the following 1-year forecasts for December 2020:

• bid-ask will be $0.68/C$ - $0.69/C$ifthe investors (and speculators) consider the U.S. dollar
• ($) a safe haven currency during the pandemic.
• bid-ask will be $0.81/C$ - $0.82/C$ifthe investors (and speculators) consider the Canadian
• dollar (C$) a safe haven currency during the pandemic

Assume that you decided to hedge using forward contracts. Assume that the expected final sales volume is 2,500. What are your total revenues and the percentage gains/losses from hedging (compared to no hedging)

a) if the exchange rate (bid-ask) remains at $0.76/C$ - $0.78/C$?

b) if the investors consider the U.S. dollar a safe haven currency during the pandemic?

Answer rating: 100% (QA)

Calculating Total Revenues and Hedging GainsLosses Scenarios Scenario 1Expected sales volume 2500 ki... View the full answer