1. Today is Feb. 2, 2021. You are an American citizen and will join SFU as an undergraduate student in May 2021. On April 30, 2021, you need to pay a college tuition of CAD $20,000. a) Please explain your foreign exchange risk (2 points) b) You would like to use June 2021 Micro CAD/USD Futures to hedge your risk. Contract size is CAD $10,000. For more information about this futures contract, please go to the website below: How many futures contracts do you need to hedge your risk? Long or short? Please explain? (3 points) c) Today, the June 2021 futures price is USD$0.7801/CAD$. The spot exchange rate is USD$0.7815/CAD$. Suppose that on April 30, 2021, the spot rate turns out to be $0.7782; and the June 2021 futures price turns out to be $0.7772. Please find out your total US dollar cost of your tuition with and without hedge on April 30, 2021. What is the basis of your hedging position? (6 points) d) Answer question c) again if the spot rate is $0.7882; and the June 2021 futures price is $0.7870 on April 30, 2021. Is your hedging effective? Why or why not? (4 points) e) On April 30, 2021, if the basis decreases unexpectedly, will your position improve or worsen? Please explain. (2 points) 1. Today is Feb. 2, 2021. You are an American citizen and will join SFU as an undergraduate student in May 2021. On April 30, 2021, you need to pay a college tuition of CAD $20,000. a) Please explain your foreign exchange risk (2 points) b) You would like to use June 2021 Micro CAD/USD Futures to hedge your risk. Contract size is CAD $10,000. For more information about this futures contract, please go to the website below: How many futures contracts do you need to hedge your risk? Long or short? Please explain? (3 points) c) Today, the June 2021 futures price is USD$0.7801/CAD$. The spot exchange rate is USD$0.7815/CAD$. Suppose that on April 30, 2021, the spot rate turns out to be $0.7782; and the June 2021 futures price turns out to be $0.7772. Please find out your total US dollar cost of your tuition with and without hedge on April 30, 2021. What is the basis of your hedging position? (6 points) d) Answer question c) again if the spot rate is $0.7882; and the June 2021 futures price is $0.7870 on April 30, 2021. Is your hedging effective? Why or why not? (4 points) e) On April 30, 2021, if the basis decreases unexpectedly, will your position improve or worsen? Please explain. (2 points)
