Our company has just made a bid today, July 11, 2018, for a service contract in
ID: 2656497 • Letter: O
Question
Our company has just made a bid today, July 11, 2018, for a service contract in Sweden.Unfortunately, the bid had to be in kronas.The current exchange rate is 8.4 SEK/USD.We will find out by September 10, 2019 whether we won the contract or not.The size of the bid is $10 Million kronas payable on October 1, 2019.The service will be delivered from October 1, 2019 through September 30, 2020.To protect ourselves against exchange rate fluctuations, we buy a European put option with an exercise price of 5.0 SEK/USD on the krona in Philadelphia Exchange for 10 Million kronas with an exercise date October 1, 2019.
Is this an appropriate strategy for us? Explain fully.
Explanation / Answer
As the receivables will be in krona, we will benefit if Krona appreciates and USD depreciates. Hedging startegy will work reverse. Hence, hedging staregy should benefit when krona depreciates and USD appreciates. To benefit when Krona depreciates, one can either short future or buy put option on Krona.
Hence, the strategy is correct.
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