Question
In: Finance
31. Problem 1 : Linden Company will receive 200,000 Canadian dollars (C$) in 90 days and...
31. Problem 1 : Linden Company will receive 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Linden has developed the following probability distribution for the Canadian dollar:
|
Possible Value of |
|
|
Canadian Dollar in 90 Days |
Probability |
|
$0.54 $0.55 |
15% 15% |
|
$ 0.57 |
20% |
|
$ 0.58 |
25% |
|
$ 0.59 |
25% |
The 90-day forward rate of the Canadian dollar is $0.575. Call options on the Canadian dollar are available with a premium of $0.02 per unit and an exercise price of $0.56 per Canadian dollar. Put options are available with a premium of $0.01 and an exercise price of $0.57 per Canadian dollar.
Clearly show your work for:
- Forward hedge: clearly show your work and answer for a forward hedge. Clearly state whether you are buying or selling the currency at the forward rate.
- Option hedge: clearly state if you are using a call or put to hedge your risk. Fill in the below table. Show any additional work below the table. Cleary state your answer.
|
Possible Spot Rate |
Option Premium per Unit |
Exercise |
Amount received per Unit |
Total amount received |
Probability |
|
Expected Receivable___________
- Unhedged strategy: Fill in the below table. Show any additional work below the table. Clearly state the value of the unhedged strategy.
|
Possible Spot Rate |
Receivable in foreign currency |
if Firm Remains Unhedged |
Probability |
|
Expected Receivable________________
- Clearly state what the best alternative for Charleston Company is and WHY: forward hedge, option hedge or no hedge.
Solutions
jeff jeffy answered 2 years agoRelated Solutions
31. Problem 1 : Linden Company will receive 200,000 Canadian dollars (C$) in 90 days and...
31. Problem 1 : Linden Company will receive
200,000 Canadian dollars (C$) in 90 days and is trying to determine
whether or not to hedge this position. Linden has developed the
following probability distribution for the Canadian dollar:
Possible Value of
Canadian Dollar in 90 Days
Probability
$0.54
$0.55
15%
15%
$ 0.57
20%
$ 0.58
25%
$ 0.59
25%
The 90-day forward rate of the Canadian dollar is $0.575. Call
options on the Canadian dollar are available with a...
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Customer
Total
0-30
31-60
61-90
Over 90
Aerosmith
$
2,000
$
1,000
$
1,000
Biggie
Small
2,000
$
1,000
$
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ZZ
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