Wolverine company mines admantium in Idaho. The admantium is sold exclusisvely to a shadowy corporation in Russia. Clearly, Wolverine company's internal cash flow will vary with exchange rate between the ruble and the dollar. Wolverine has determined that its optimal exploration budget next year will be $400. The table below shows the possible levels of exploratoin and their respective NPV's.
Exploration Expenditure Discounted Cash Flows NPV
$200 $220 $20
$400 $440 $40
$600 $620 $20
Wolverine's CFO has estimated that internal cash flows will be $200 if the dollar appreciates against the ruble, $400 if the exchange rate doesn't change, and will be $600 if the dollar depreciates against the ruble. Wolverine will not finance exploration with new external financing.
A. What proceeds from heding would Wolverine desire under each of the three exchange rate scenarios?
B. How much additional exploratoin would Wolverine undertake under the three exchange rate scenarios as a result of its heding program?
C. What is the net value from hedging under the three exchange rate scenarios?