Reference no: EM132535359

Swarovski is an Austrian producer of premium jewelry and fashion accessories. One of its many production locations is in Thailand. Due to the high demand of their products and cheap labour in Thailand, they rely more on their Thai producers. Swarovski is expecting 100 million Thai Baht (THB) production cost in 1 year. Swarovski has plenty of reserve in Euros as Euro is the legal tender in Austria. However, the Thai producers accept payments only in Thai Baht. At present, 1 euro can exchanged for 34.5 Baht. Swarovski is expecting that the euro will depreciate further because the current pandemic situation has hit the European countries most. Therefore, Swarovski wants to reduce its exchange rate risk Swarovski followed the financial market in both Austria and Thailand and discovered few options to reach its goal. It has found out that there are two option contracts available. One is a long position in baht call option with 0.0291 euro exercise price and 0.001 euro premium and another one is long position in euro put option with 34 Baht exercise price and 1 Baht premium. In addition, the 1 year fixed deposit rate in Austria is 5.6% and borrowing rate is 7.2% whereas in Thailand, both the rates are 1.5% lower than Austria. The forecaster of Swarovski estimated that there is 60% chance that within a year, 1 Euro will be equivalent to 34 Baht, 30% chance of getting 35.5 Baht for a Euro and 10% chance of getting 36 Baht per Euro and vice versa. Future contracts in Baht are also available in Thailand at 0.0298 Euro. Swarovski is determined to find out a way from all these alternatives to reduce its loss.

Required: By using above information, analyze all the possible choices Swarovski has and find out the best choice among them. You should also conclude that is it necessary for Swarovski to choose the best alternative among them or it is better off without applying any techniques.