Question

As an American exporter, I need to hedge a 2.1 million Canadian transaction taking place in 2 months. Here is some data.

Spot rate 0.7082-83 $/C

2 month forward rate 0.7100-01 $/C

Spot rate in 2 months turns out to be 0.600-01 $/C

Canadian options pricing data for options with an exercise price of 0.71 $/C

            Now    End

Call      .05      0

Put       .04       .14

Option prices are in dollars.

Please hedge it with options, forwards, no hedge, and rank them

USE CONTRACT SIZE 100,000

Answer 1

1. Hedging With Options = we are going to sell canadian dollar at expiry it means we need to buy put options

Thus Receipt as per Options = receipt of Canadian $ in US Dollar - Premium Paid

Receipt as per Options = 2100000 * 0.71 - Canadian $ * Spot Bid Rate * Option price

Receipt as per Options = 2100000 * 0.71 - 2100000 * 0.7082 * 0.04

Receipt as per Options = $1431511

2. Receipt as per Forward Contract = Canadian $ * Forward Bid Rate

Receipt as per Forward Contract = 2100000 * 0.71

Receipt as per Forward Contract = $1491000

3. Receipt as per No Hedge = Canadian $ * Future Spot Bid Rate

Receipt as per No Hedge = 2100000 * 0.600

Receipt as per No Hedge = $1260000

Ranking

Options - Rank 2

Forward - Rank 1

No Hedge - Rank 3

Please dont forget to upvote