Question

a. A Canadian based tire company is due a 2,500,000 SGD payment from its Singapore based distributor in 2 months. The Canadian firm hedges the exchange rate risk using a forward contract priced at 0.80 CAD/SGD. If the Singapore dollar depreciates over the next 2 months to a spot rate of 0.73 CAD/SGD, how much more or less will the Canadian-based tire firm receive in Canadian dollars by hedging versus an unhedged position ?

b. Suppose the current exchange rate US$/Swiss Franc is 1.02 dollar/franc. What is the 7 month forward exchange rate US$/Swiss Franc assuming a continuously compounded Swiss risk free rate of 2% and a continuously compounded U.S. risk-free rate of 1%?

c. Is there any risk left for a U.S. investor who hedges using the forward contract described in the previous point?

Answer #1

A Canadian based tire company is due a 2,500,000 SGD payment
from its Singapore based distributor in 2 months. The Canadian firm
hedges the exchange rate risk using a forward contract priced at
0.80 CAD/SGD. If the Singapore dollar depreciates over the next 2
months to a spot rate of 0.73 CAD/SGD, how much more or less will
the Canadian-based tire firm receive in Canadian dollars by hedging
versus an unhedged position ?

Christina Company (a U.S.-based company) has a subsidiary in
Canada that began operations at the start of 2020 with assets of
140,000 Canadian dollars (CAD) and liabilities of CAD 70,000.
During this initial year of operation, the subsidiary reported a
profit of CAD 34,000. It distributed two dividends, each for CAD
5,800 with one dividend declared on March 1 and the other on
October 1. Applicable U.S. dollar ($) exchange rates for 1 Canadian
dollar follow:
January 1, 2020 (start...

You have the following market data. Spot price for the Swiss
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continuously compounded rate of 3.54% per annum. Underlying asset
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(a) Suppose a fund owns stocks in a foreign country. State the
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(compounded continuously). Calculate both the no arbitrage forward
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year forward contract on the CAD-EUR exchange rate.

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this position, using a forward contract.
What kind of a forward contract will they use? Explain.
Suppose Grand Tour Co. decides it is best to leave this
position unhedged. What is their expectation about the...

. Consider a U.S.-based company that exports goods to
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million SF on a shipment of goods in three months. Because the
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against a decline in the value of the Swiss franc over the next
three months. The U.S. risk-free rate is 2 percent, and the Swiss
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Q1. A U.S.-based importer, Zarb Inc., makes a purchase
of crystal glassware from a firm in
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of the purchase are net 90 days, and the U.S. firm
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market hedge to eliminate its exchange rate risk.
Suppose the firm completes a forward hedge at the
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The spot exchange rate for Canadian dollars is $C1.33/$US.Dollars
six-month interest rate
one-year interest rateCanada
2%
2.5%U.S.
2.5%
2.75%a. What is the six-month fair forward
exchange rate?b. Is the Canadian dollar a discount
or premium currency vs. the United States dollar?c. What does it cost in U.S. dollars
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You have the following market data.
Spot price for the Swiss Franc is $1.156 per Franc.
Two-month forward price is $1.22 per Franc.
U.S. dollar LIBOR for two months is a continously compounded
rate of 1.75% per annum.
Swiss LIBOR for two months is a continuously compounded rate of
2.05% per annum.
Underlying asset for this contract (i.e., the quantity of Swiss
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What is the total net profit if...

As a Canadian Saver, you intend to invest $50,000 in one of the
three investments described below. The world risk-free rate is 1%.
There is a 2% risk-premium on the Canadian discount bond but a
Brasilian discount bond has a risk-premium of 6%. The current
nominal Cad-Brasilian exchange rate is eCAD = 3 (Reals per Cad
dollar). Before the pay-out next period, you expect the Real to
depreciate relative to the Cad$ to a new nominal exchange rate,
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