Question

An American company will be given 1,500,000 CAD in 180 days (360 days per year), and...

An American company will be given 1,500,000 CAD in 180 days (360 days per year), and it wants to maximise the USD value of this transaction.

Call and put options on the CAD in USD are available with the following specifications:

Call premium: 0.04 USD, Strike price of a call = 0.74 USD/CAD

Put premium: 0.03 USD, Strike price of a put = 0.75 USD/CAD

The annual interest rate in US and Canada is 2% and 4% respectively. The current spot rate is 0.60 USD/CAD and 180-day forward rate is 0.62 USD/CAD. The expected CAD spot rate in 180 days has 45% chance to appreciate by 12%,  55% chance to depreciate by 7%.

  1. Please calculate the company's revenue
    1. if making a forward hedge
    2. if making a money market hedge
    3. if making an option hedge
    4. if no hedge

Please show workings, a detailed answer will receive the thumb up for sure. Thank you:)


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