Assume that a US based firm, Florida Inc. expects to pay CAD 900,000 in one year. The existing spot rate is 1 CAD = 0.76 USD. The one year forward rate of the CAD is USD 0.79. Florida created a probability distribution for the future spot rate of CAD in one year as follows:

Future Spot Rate Probability

USD 0.75 20%

USD 0.78 50%

USD 0.81 30%

Assume one year put options on CAD with an exercise price of USD 0.81 and a premium of USD 0.03 per unit. One year call options on CAD are available with an exercise price of USD 0.77 and a premium of USD 0.02 per unit. Assume the following money market rates:

USA Canada

Deposit rate 5% 3%

Borrowing rate 6% 4%

Given the above information, what is the best hedging strategy for Florida?

	A.	Forward hedge
	B.	Option hedge
	C.	Money market hedge
	D.	No hedge