Question
A UK Company expects to receive 500,000 Canadian Dollars. The actual due date, falls exactly six months from now. The finance manager decides to hedge
A UK Company expects to receive 500,000 Canadian Dollars. The actual due date, falls exactly six months from now. The finance manager decides to hedge the transaction, using forward contracts. Interest rate in Canada is 15%, while that in UK is 12%. Current spot rate is Pound Sterling 1 = Canadian dollar 2.5. Assume that the forward exchange rate differential reflects the Interest Rate Parity. The UK Company hedged its transaction, and there are three options possible if sterling pound was to: (i) Gain 4% (ii) Lose 2% or (iii) Remain stable at present level Evaluate the situation with regards to each of the three options above.
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