Nike is an is an American multinational corporation that is engaged in the design, development,...
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Nike is an is an American multinational corporation that is engaged in the design, development, manufacturing, and worldwide marketing and sales of footwear, apparel, equipment, accessories, and services. 26% percentage of Nikes operating income are generated in Europe and only 4% of its raw materials are sourced in Europe. Being an American company, the domestic currency used for valuation is the U.S. dollar.
The company wants to assess its economic exposure to changes in the EURUSD exchange rate and has forecasted the possible operating income and costs in three economic states as follows:
Table 1: Economic States Exchange rates and European operations (in millions)
Scenario
Bust
Average
Boom
Probability
25%
50%
25%
EURUSD
1.3581
1.1264
1.0034
Operating Income in EUR
32,781.12
38,197.41
42,558.85
Operating Costs in EUR
1,113.46
2,836.41
4,725.59
Estimate the sensitivity of Nikes net dollar cash flows to changes in the EURUSD.
Discuss the different operating hedging strategies that Nike could use to reduce its economic exposure to the euro.
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