Aifs

Topics: Strike price, Derivative, Call option Pages: 3 (634 words) Published: November 10, 2011
4. What happens if sales volumes are lower or higher than expected as outlined at the end of the case? Base Case

Sales Volume| 25,000| Number of options| 25,000| Number of Contracts| 25,000| Cost per participants| 1,000 Euro| Option Strike Price| 1.22| Forward Strike Price| 1.22| | | Option Premium| 61| | |

Total Cost (USD)

| |  | USD Exchange Rate (USD/EUR)| |
%Cover| Contracts| Options| 1.01| 1.22| 1.48|
100%| 0%| 100%| $26,775,000| $32,025,000| $32,025,000| 100%| 100%| 0%| $30,500,000| $30,500,000| $30,500,000| 0%| -| -| $25,250,000| $30,500,000| $37,000,000|
| | | | | |
| |  | USD Exchange Rate (USD/EUR)| |
%Cover| Contracts| Options| 1.01| 1.22| 1.48|
100%| 0%| 100%| $3,725,000| -$1,525,000| -$1,525,000| 100%| 100%| 0%| $0| $0| $0|
0%| -| -| $5,250,000| $0| -$6,500,000|

Lower Sales Volume

Sales Volume| 10,000| Number of options| 25,000| Number of Contracts| 25,000| Cost per participants| 1,000 Euro| Option Strike Price| 1.22| Forward Strike Price| 1.22| | | Option Premium| 61| | |

Total Cost (USD)

| |  | USD Exchange Rate (USD/EUR)| |
%Cover| Contracts| Options| 1.01| 1.22| 1.48|
100%| 0%| 100%| $11,625,000| $13,725,000| $9,825,000| 100%| 100%| 0%| $15,350,000| $12,200,000| $8,300,000| 0%| -| -| $10,100,000| $12,200,000| $14,800,000|
| | | | | |
| |  | USD Exchange Rate (USD/EUR)| |
%Cover| Contracts| Options| 1.01| 1.22| 1.48|
100%| 0%| 100%| $575,000| -$1,525,000| $2,375,000|
100%| 100%| 0%| -$3,150,000| $0| $3,900,000|
0%| -| -| $2,100,000| $0| -$2,600,000|

In the case of lower volume, AIFS will be over-hedged, resulting in a reduction of profits when US dollar is strong against other currencies. When the sales are low and the company is out of money, the company has an excess of currency. The option contract is more favourable...
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