Question

# Please no excel usage A Canadian company with operations in Germany expects to purchase 20 million...

Answer for part i is option C. Buy a three month forward contract on 20 million euros today

Explanation

Spot rate after expiration period is C\$ 1.30/Euro.

Amount to be paid in spot market after 3 months to buy 20 million euros = 1.30 * 20 million = 26 million canadian dollars.

Forward Contract Rate is C\$ 1.25/Euro.

Amount to be paid in forward market today to buy 20 million euros = 1.25 * 20 million = 25 million canadian dollars.

Hence it is better to enter into a forward contract today.

ii) Company's profit on entering into a forward contract is 1 million canadian dollars (1.30-1.25)*20 = 1 million.

iv) Loss of 5 million dollars if the company enters into a forward contract.

Consideration received when entering in to a forward contract at \$ 0.30/sole = 50 * 0.3 = 15 million dollars

Consideration received when in spot market after 12 months at \$ 0.40/sole = 50 * 0.4 = 20 million dollars