An American firm exports a product to Canada for CAD 2,500,000. They have a contract to receive payment from the importer in one year. The American firm is considering hedging the entire export contract with an options hedge. A call option with a strike price of $0.82/CAD on the CAD is available for a premium of $0.005/CAD. A put option with a strike price of $0.80/CAD on the CAD is available for a premium of $0.004/CAD. A. Explain which of the options above they should purchase to hedge this risk and why. B. How much would they pay for the option today? C. What would determine whether they exercise this option in one-year? Explain, using numbers in your explanation. D. Suppose that the American firm purchases the option. Suppose further that the spot price on the CAD is $0.78 when the American exporter is paid by the Canadian firm. How much do they profit from the option? Activate Window