Bridge Ltd is an MNE with its holding company located in Sydney, Australia. It has a Canadian subsidiary which has a CEO who has performed particularly well and is due to receive a bonus of $12m Canadian Dollars (CAD) payable in 6 months from the holding company in Sydney to the subsidiary in Toronto.

You are considering hedging your exposure to CAD. The following quotes are available.

Spot exchange rate CAD1.2 / AUD

Expected spot rate in 6 months CAD1.23 / AUD

6-month forward rate CAD 1.2059 / AUD

6-month CAD interest rate 4% per annum

6-month AUD interest rate 3% per annum

6-month Call option on CAD at strike price of CAD1.2250 / AUD, premium of AUD 0.0130 / CAD.

Bridge's opportunity cost of capital, 8% per annum.

Give all answers to the nearest number.

a) What are the costs of each alternative for hedging the payable to the Canadian Subsidiary?

i. Do nothing - remain uncovered. Assume the spot rate today is the same as the current spot rate

ii. Do nothing - remain uncovered. Assume the spot rate today is the same as the expected spot rate in 3 months

iii. Money market hedge. (7.5 marks)

This would require the MNE to

borrow from

invest with

The amount they would borrow/invest is

They would require us to exchange this into

in the spot market

The final cost in 6 months will be

At maturity they would receive from the...

iv. Buy a 6 months call on the CAD. (6 marks)

Assuming the option is exercised the amount received will be

The cost of the option will be

The opportunity cost of the premium will be

Net costs will be

If the option is not exercised the net costs (Assuming the rate is CAD1.23 / AUD) will be: