# Only answer the 3 question according the article Essay Example

1. Analyze in the provided spreadsheets the scenario outlined on pages 6 and 7 of the case, namely the case of 25,000 students projected sales volume.

The scenario provided by the spreadsheet for the case of 25,000 students analyzes consequences of different hedging strategies. The strategy first focuses on the expected final sales volume and its outcome with regards to the three hedging strategies that can be employed. The scenario is company policy of 100% hedging and focus on use of forward and options strategies. The figure shows the impact no hedging, 100% hedge with forwards and 100% hedge with options. The cost per student is projected at €1,000 per student and all contracts bought with strike price of \$1.22/€ with option premium of 5% of USD notional value. These results to €25,000,000 as amount hedged as we consider 25,000 predicted volume the cost of option stands at \$1,525,000. The figures drive the benchmark \$ cost at this volume to \$30,500,000.

The predicted volume cannot be looked at in isolation of USD exchange rate (\$/€) with regards to hedge used hence the model include three different exchange rates levels for the dollar at stable dollar (1.22 USD/EUR), strong dollar (1.01 USD/EUR) weak dollar (1.48 USD/EUR). The impact of these three strategies differed with varying levels of exchange rates. Unhedged strategy had adverse impact of -\$6,500,000 in face of weak dollar (1.48 USD/EUR) and performed favorably, \$5,250,000 in face of strong dollar (1.01 USD/EUR). The 100% forward hedge strategy had \$0 impact while 100% option hedge strategy impact had an adverse impact of -\$1,525, 000 in face of weak dollar (1.48 USD/EUR) and performed favorably at \$3,725,000 in face of strong dollar (1.01 USD/EUR), though favorable it’s not as good as Unhedged performance at strong dollar (1.01 USD/EUR).

2. Analyze the outcomes relative to the ‘zero impact’ scenario mentioned in the case on page 6.

In comparison of the benchmark costs which stands at \$30, 500,000 with a projected sales volume of 25,000 and charges being made at USD/€ exchange rate, then this will result to no impact in the scenario as projected cost will equal participants charges at the given volume. 3. Which hedging policy would you recommend for this volume-as-expected scenario? Explain.

I would recommend 100% option hedge strategy impact that had an adverse impact of -\$1,525, 000 in face of weak dollar (1.48 USD/EUR) and performed favorably at \$3,725,000 in face of strong dollar (1.01 USD/EUR), though favorable it’s not as good as Unhedged performance at strong dollar (1.01 USD/EUR) which resulted to \$5,250,000 in face of strong dollar. This strategy will be more favorable as it will lower risks in a scenario of strong dollar and high volumes as opposed to completely Unhedged whose adverse effect could results to huge losses to the company. Hedging strategies does not produce win all the time, sometimes/half of times wins and others losses and AIF’s policy of 100% coverage can be justified as the margins of gains at weak dollar though meaningful could not offset a scenario of shared risk in % of two strategies being employed as at 50% of the time of strong dollar, both 100% option and completely Unhedged can result to a more negative results, hence my choice of going with 100% option hedge strategy.