Dell is selling 20,000 units in Europe at an average price of €1,700 per unit. Both the spot and forward exchange rates are $1.20/€. The cost of each unit in dollars is $1,500 per unit. The elasticity of demand for Dell computers in Europe is ε = 1.5.

1. Now consider a depreciation of Euro (relative to US dollar) from $1.20/€ to $1.08/€ and assume zero passthrough. What is Dell's dollar profit exposure and how to hedge it using forward?

a. $45 million, buy $45million forward

b. €45 million, sell €45million forward

c. $34 million, buy $20 million forward

d. €34 million, sell €34 million forward

2. What is the delta for Dell's profit assuming zero passthrough?

a. 0

b. 2.35

c3.78

d.3.65

3. Reconsider a depreciation of Euro ( relative to US dollar) from $1.20/€ to $1.08/€. Now assume passthrough = 0.5. What is Dell's total profit in $?

a. $11,869,440

b. $8,028,860

c. $12,028,410

d. $6,397,440

4. What are respectively the delta and exposure for Dell's dollar profit passthrough =0.5?

a. delta = 1.981; exposure = €17,829,000 million

b. delta = 1.137; exposure = €10,233,000 million

c. delta = 2.566; exposure = €23,094,000 million

d. delta = 5.741; exposure = €51,660,000 million

pur-new-sol

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