Solution-Compare to the unhedged position

Compare to the unhedged position

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Reference no: EM133112475

This question also connects with the FXstreet forecasts and the hedging decision depends on the number of analysts projecting an adverse movement.

If ALL analysts think the foreign currency is going up, then you want to hedge the lowest amount possible of the receivables, which is 25% If the forecasts suggest the foreign currency is going down, then you will definitely want to hedge 100% of the exposure. You can vary your amount to hedge based on the number (%) of analysts expecting an adverse movement. Select the hedging level and calculate the profit/loss for each hedging technique. Compare to the unhedged position (no hedge case) and determine what strategy was the best.

Question: Which alternative was best in this case? Was your forecast useful?

Pair movement that hurts us	Down
# analysts expecting such movement	2	Amount to leave unhedged		750,000
# forecasts avaiable	10	Amount to hedge		250,000
Percentage to hedge	25%
		Amount received if left unhedged		$ 1,144,600

	Unhedged revenue	Hedged revenue	Total	P/L
Forward hedge	$ 858,450	$ 289,089.25	$ 1,147,539	-2,939
Future hedge		$ 292,280.00	$ 1,150,730	-6,130
Put options hedge (ITM)		$ 283,572.14	$ 1,142,022	2,578
Put options hedge (ATM)		$ 284,096.01	$ 1,142,546	2,054
Put options hedge (OTM)		$ 284,945.39	$ 1,143,395	1,205
Money market hedge		$ 216,122.27	$ 1,074,572	70,028	Highest value created

Reference no: EM133112475

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Compare to the unhedged position

Reference no: EM133112475

Reference no: EM133112475

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