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Hedge

Need help getting started on a paper for the following -

When you sell a product made in the Euro area in the U.S. The price increases have sharply cut you sales. You are worried that the Euro will increase again causing a further loss. You can buy a currency hedge for 2009 that would allow you to convert dollars into Euros at $1.59, regardless of the higher conversion rate. The Hedge will cost 4% of the amount exchanged but the hedge must be bought now and the 5% will be paid even if the option is not used.

I need to get a start understanding under what conditions will it be profitable and should the hedge be bought?

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The hedge should definitely be bought, especially when the importer in US strongly believes that dollar will further weaken against the Euro, thereby making the imported product much more costlier in the future. By buying the hedge, the exporter is at least ...

Solution Summary

When you sell a product made in the Euro area in the U.S. The price increases have sharply cut you sales. You are worried that the Euro will increase again causing a further loss. You can buy a currency hedge for 2009 that would allow you to convert dollars into Euros at $1.59, regardless of the higher conversion rate. The Hedge will cost 4% of the amount exchanged but the hedge must be bought now and the 5% will be paid even if the option is not used.

I need to get a start understanding under what conditions will it be profitable and should the hedge be bought?

$2.19