Introduction

The purpose of the project is to determine the combination for a certain percentage of unhedged,
forward hedged and options hedged. The Winery in Santa Barbara had entered into a contract with a
French importer and that the contract requires Chardonnay to be exported to France by December 2016
from which it is guaranteed to attain around 900,000 by December 2016. In order to carry out the
further proceedings, there is a need to explore a strategy to maintain the currency risk due to which
hedging is required.

Hedging Strategy
Since the dollar is appreciating within the previous months and that the Federal Reserve keeps on
increasing the interest rate while decreasing the money supply, it should also be noted that the interest
rate of EU is quite low. Therefore, the best hedging strategy would be to implement Forward
Contract/Put Option. The combination of 30%, 40% and 30% is selected due to the fact the risk would be
managed or shared within these three options and that can simply reduce the risk effectively.

Findings

(1) Unhedged:
300,000 M x $ 1.2000/ = $ 360000 M
The spot rate in Jan 2016 was $1.200/
When we convert the euros to dollar, 30% of 900,000 is to be multiplied by the spot rate and
the total value attained is $360000 M

(2) Forward hedged:

300,000 M x $ 1.1052/ = $ 331560 M
For the forward hedged, the Jan 2016 forward rate is taken as $1.0542/ and when 300,000 is
converted into the desired currency i.e. dollars, the result is $331560 million.
(3) Options hedged:
300,000 M x $ 1.1 / 300,000 x $ 0.0415/
= $330,000 $ 12,450
= $ 317550

For the option hedged strategy, the value received by the company is $317550 as the strike for
put is $1.1/ while ASK is $0.0415/.
Revenue of Scenario 1= the sum of (1), (2), (3)

= $ 360,000 M + $ 331,560 M + $ 317,550

= $ 1009110
Totalling up the revenue for Scenario 1, we came to the output as $1009110.

Scenario 2:
(1) Unhedged:
300,000 M x $ 1.0000/ = $ 300000 M
Here, the spot rate is $1/ where the value attained will be exactly same as before conversion.
(2) Forward hedged: Same as scenario 1
(3) Options hedged:
300,000 M x $ 1.1 / 300,000 M x $0.0415 /
= $ 330,000 $ 12,450
= $ 317550

The Strike here is $1.1/ and ASK is $0.0415, for options hedged, the value to be determined is
to substract both of them to reach the final value as determined by the options hedged strategy.

Revenue of Scenario 2= the sum of (1), (2), (3)

= $ 300,000 M + $ 331,560 M + $ 317,550

= $ 949110

Conclusion
It should be noted that when businesses hedge the positions, it preserves the value of the money to be
attained. In scenario 1, with the appreciation in dollar versus the Euro, the owner was able to receive
certainly more amount that the 2nd scenario where the total revenue obtained is slightly lesser than the
former.