Question

You believe that the US dollar (USD) will fall in value against the Canadian Dollar (CAD). Your best strategy is to...

A.
Borrow in CAD, exchange your CAD for USD, put your USD in a US bank until the dollar depreciates and finally, exchange your USD for CAD and repay your CAD loan.

B.
Write a call option on the US Dollar

C.
Buy a call option on the Canadian Dollar

D.
Buy a put option on the US Dollar

E.
All of the above a good strategies.

F.
None of the above

Answer 1

Increase/Decrease in "VALUE" is INVERSELY Proportional to Increase/Decrease in "PRICE"

As US Dollar will FALL IN "VALUE", $/C$ will INCREASE.

For example, If currently $1 = C$1, then later $ will become MORE THAN 1 and C$ will REMAIN 1.

Call Buyer has a Right to Buy, where as Call Writer has an Onligation to Sell. Therefore, Writing Call on $ is NOT a good idea, as Price is going to increase. At the same time, Buying a Call on C$ is also NOT a good idea, because its PRICE will reduce compared to $.

Put Buyer has a Right to Sell. As mentioned in above point, Price of $ will Increase. Therefore, Buying Put on $ is also not a good idea.

As per Interest Rate Parity, if $ is going to fall in value, it will yield more interest. Therefore, Arrangement given in (A) will yield more return, as $ is investd at higher rate and C$ will be borrowed at lower rate.

Therefore, Option (A) is Correct