Hedging Currency Risks At Aifs Case Study Help
100% with Options
This alternative provides increasingly adaptable opportunities to settle on the choice on any circumstance. On the off chance that the present market value crosses the strike cost concurred in contact, at that point; the agreement purchaser can utilize the alternative of option to call, which implies that the agreement dealer will be dependent on satisfying the agreement by selling concurred cash on the strike cost. Be that as it may, it is costly to the organization. In addition, in the event that the organization purchases 25 million Euros contracts against the US dollar; at thispoint, 5 percent of Notional of US dollars’ worth will be charged as 1.525 million dollars,as the cost against the alternative agreements.
Analysis of Hedging Policies
Different levels of hedging strategies provide completely different values. If we choose a 100% futures strategy to reach the 100% goal; three columns will appear, representing three different price points, such as: stable US dollar 1.22, low US dollar 1.01 and strengthened US dollar by 1.48.
In case of stable US dollar; this value will represent the total cost of selling without a hedging strategy, and the value will be in line with the estimated costs. So, unless the US dollar rises or falls; it wouldn’t have any effectsagainst the Euro.
If the US dollar appreciates against the Euro; it will last a positive impact on the company because its accounting costs will decrease.If the opposite is true; the dollar will weaken against Euro, which will last a negative impact.
Therefore, to avoid such negative effects; the strategies discussed above were adopted, as shown in the Exhibit 1. The model clearly gives the hedging value of three levels; covering three different expected prices, with each level having a different reason for the contract price (as an option), and each level determining the percentage of contracts and options..............................
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