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In: Finance

Assume that a US based firm, Florida Inc. expects to pay CAD 900,000 in one year....

Assume that a US based firm, Florida Inc. expects to pay CAD 900,000 in one year. The existing spot rate is 1 CAD = 0.76 USD. The one year forward rate of the CAD is USD 0.79. Florida created a probability distribution for the future spot rate of CAD in one year as follows:

                        Future Spot Rate                            Probability

                        USD 0.75                                            20%

                        USD 0.78                                            50%

                        USD 0.81                                            30%

Assume one year put options on CAD with an exercise price of USD 0.81 and a premium of USD 0.03 per unit. One year call options on CAD are available with an exercise price of USD 0.77 and a premium of USD 0.02 per unit. Assume the following money market rates:

                                                                                    USA                Canada

                        Deposit rate                                         5%                   3%

                        Borrowing rate                                    6%                   4%

Given the above information, what is the best hedging strategy for Florida?

A.

Forward hedge
B.

Option hedge
C.

Money market hedge
D.

No hedge

Solutions

Expert Solution

jeff jeffy answered 1 year ago
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