Question

2. On June 1st, 2020, Ford expects to ship 100,000 boxes of parts from its Canadian subsidiary to its US dealers on 270-day terms at $500 per box. Therefore, Ford will receive $ payments from these outlets on February 26th, 2021. Assuming that Ford needs to cover its C$ expenses in Canada and thus wants to hedge its C$/$ exposure using a forward contract with Citibank, what is the minimum amount of C$s they should receive on February 26th, 2021 given the 9-month forward rate you calculated in problem one for one $ in terms of C$? What are two other ways Ford might hedge its C$/$ exposure?

Answer 1

100000 boxes, 500$ per box

From Canada --> US, on June 1st 2020

Payments in $ on 26th Feb 2021

To hedge risk Ford enters forward contract to exchange $ for C$

Suppose, the calculated forward rate is "X" C$ per $(this X, you have to substitute from previous question)

Payment to be received in $ = 100000*500 = 50 million $

Payment after the conversion to C$ = 50*X million C$

Ford can hedge the risk

1. Using forward contract -> Long forward (to exchange $ into C$)

Long means buy position. So, Ford will receive C$ in exchange of $ and the exchange rate will be fixed today.

2. Using forward contract -> Short forward (to exchange C$ into $)

Short means sell position. So, Ford will provide $ in exchange of C$ and the exchange rate will be fixed today.