3. American Corporation, located in the United States, has sold goods to Canadian firm with a value of 8,000,000 CAD. The current spot rate is $0.7467/CAD and the one year forward rate is $0.7325/CAD. American Corporation can buy a one-year put option on CAD with a strike price of $0.7350 per CAD for a premium of $0.01 per CAD. Interest rates are 5% in the United States and 7% in Canada.

a. What currency effects should concern American Corporations management?

b. Calculate the dollar value of the proceeds if American Corporation uses a forward hedge.

c. Calculate the dollar value of the proceeds if American Corporation uses a money market hedge.

d. If American Corporation regards the forward rate as the best predictor of the spot rate, what is the expected dollar value of the proceeds if they use an options hedge?

e. Based on these circumstances, should American Corporation hedge with a forward contract? In the money market? Or with an option?

f. If American Corporation decided to hedge using the futures market, what position would they need to take? You cannot calculate expected profits since there is no information provided about futures contract. Only specify the position necessary.