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Basic information for this currency pair USD/CAD
1. Determine the percentage change in the currency’s value over the period studied
2. Assume that on the day of DC1, you had contracted to purchase imports, which would require you to pay 1 million units of the currency on the day of DC2.
a. If you had hedged your position with a forward hedge, how many dollars would you have paid for the goods as of the end of the period?
b. If you had hedged your position with a futures hedge, how many dollars would you have paid for the goods as of the end of the school term?
c. If you had hedged your position with a call option hedge, how many dollars would you have paid for the payables as of the end of the period?
d. Assume that you used a money market hedge at the beginning of the school term by borrowing USD at the LIBOR rate + 2%, converted into the foreign currency and invested at the LIBOR rate for the foreign currency to obtain enough money to pay for the account payable.
How many dollars would you have to pay on the loan at the end of the school term?
e. If you did not hedge, how many dollars would you have paid for the goods as of the end of the school term?
f. Fill out the table below
Strategy used for payables Unit cost Total dollar amount paid before commissions Total cost after considering CME fees
3. This question connects with the forecast obtained in Fxstreet
Assume that the hedging decision depended on the forecast of the currency from FX street. If ALL analysts suggest that foreign currency is going up, then you want to hedge 100% of the payables. If ALL analysts suggest that foreign currency is going down, then you will play it conservatively and only hedge 25% of the exposure. You can choose to hedge a fraction of the amount based on the number (%) of analysts expecting an increase. Select the level and calculate the profit/loss for each hedging technique compared to the unhedged position (no hedge case).
Which alternative was best in this case? Was your forecast useful?
The best alternative is call option hedge OTM
4. Assume that as of the beginning of the school term, you had contracted to sell exports, which would result in your receiving 1 million units of the foreign currency at the end of the school term.
a. If you had hedged your position with a forward hedge, how many dollars would you have received for the goods as of the end of the school term?
b. If you had hedged your position with a futures hedge, how many dollars would you have received for the goods as of the end of the school term?
c. If you had hedged your position with put options, how many dollars would you have received for the goods as of the end of the school term (account for the premium that you paid for the put option)?
d. Assume that you used a money market hedge at the beginning of the school term by borrowing foreign currency at the LIBOR rate + 3%, converted into USD and invested in the business at an annual rate of 8%. How many dollars would you “receive” at the end of the school term?
e. If you did not hedge, how many dollars would you have received for the goods as of the end of the school term?
Final spot Total revenue
f. Fill out the table below
Strategy used for receivables Unit price Total dollar amount received
“5. This question also connects with the FXstreet forecasts and the hedging decision depends on the number of analysts projecting an adverse movement.
Which alternative was best in this case? Was your forecast useful?
The forward hedge provides the highest benefit for the investor.
6. What have you learned about the different hedging methods? Compare MM hedge and forward hedge. Compare forward hedge and futures hedge. Compare options and futures. Which is easier to use? Which is riskier? Which has a higher initial cost?
The two alternatives provides advantages and disadvantages to investor. The use of options provides the alternative to execute or not the derivative according to the conditions of the market until maturity, different to future, which depends on the spread between the future value and current value
