In: Finance
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:
Possible Spot Rate |
Option Premium per Unit |
Exercise |
Amount received per Unit |
Total amount received |
Probability |
|
Expected Receivable___________
Possible Spot Rate |
Receivable in foreign currency |
if Firm Remains Unhedged |
Probability |
|
Expected Receivable________________