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 $1.2/€ to $1.08/€ and assume zeo 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
c. 3.78
d. 3.65