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Grand Tour Co. is based in U.S.A. It exports IT hardware to a Canadian Company. Its...

Grand Tour Co. is based in U.S.A. It exports IT hardware to a Canadian Company. Its sales of IT hardware are denominated in Canadian dollars. It will receive two million Canadian dollars from selling IT hardware in 12 months. Grand Tour Co. decided to hedge this position, using a forward contract.
  1. What kind of a forward contract will they use? Explain.
  2. Suppose Grand Tour Co. decides it is best to leave this position unhedged. What is their expectation about the future value of the Canadian dollar?
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Answer #1

a.

Grand Tour is exporting It hardware to Canada.

Grand tour will recieve Canadian dollars and sell those Canadian dollars to recieve USD. Hence he has risk of Canadian dollars depreciating in value and USD appreciating in value . So Grand tour will enter into Short Forward contract for a foreex where Canadian dollars is base currency. So Grand Tour will go short on USD / CAD .

b.

If Grand Tour is leaving the position unhedged then they are expecting the Canadian dollars to appreciate and USD to depreciate over the upcoming one year. So the company will benefit from the same if the position is unhedged.

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