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. 8| 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 in this situation. When the sales are the low and the company is in the money, the forward contract is more favourable because option contracts costs more. Higher Sales Volume Sales Volume| 30,000| 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| 00%| 0%| 100%| $31,825,000| $38,125,000| $39,425,000| 100%| 100%| 0%| $35,550,000| $36,600,000| $37,900,000| 0%| -| -| $30,300,000| $36,600,000| $44,400,000| | | | | | | | |  | USD Exchange Rate (USD/EUR)| | %Cover| Contracts| Options| 1. 01| 1. 22| 1. 48| 100%| 0%| 100%| $4,775,000| -$1,525,000| -$2,825,000| 100%| 100%| 0%| $1,050,000| $0| -$1,300,000| 0%| -| -| $6,300,000| $0| -$7,800,000| For higher sales volume, AIFS will be under-hedged, resulting in a loss when the market exchange rate goes up. When the sales are higher and the company is out of money, option contract is favourable because company has not to buy Euro at higher rate.

When the sales are higher and the company is in money, the company loss is in difference on volume of sales and the increase of the exchange rates. 5. What hedging decision would you advocate? We would suggest using the forward contracts as the gain is larger with forward contracts because it guarantees the amount of currency AIFS would pay receive and is exempted from paying 5% option premium. Moreover, it has maturity of up to 1 year and sometimes longer. The forward contract is a good option as the company is limited on cash and May not able to pay advance premium.