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2. Suppose a Canadian firm expects to receive a payment from a British customer of Elm (1,000,000) in a year's time. The current exchange rate
2. Suppose a Canadian firm expects to receive a payment from a British customer of Elm (1,000,000) in a year's time. The current exchange rate is CA$1.72 = 1; the one-year forward rate is CA$1.75 =1. Canadian interest rate is 5% per annum; British interest rate is 2% per annum. The firm can both borrow and lend at these interest rates from Britain or Canada. The firm's best guess of the future exchange rate in a year's time is CA$1.80 = 1. Question: The firm is looking for the profitable options that are available for it in a year's time. (a) What options does the firm have? Calculate the values for each option and compare among the options. (b) Which option would be chosen by the firm? Why
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