c) Suppose that the future spot exchange rate (CAD/GBP) is expected to be 2.42 and the six-month forward rate (CAD/GBP) is 2.46. Discuss whether ex post the hedged position is preferable to an unhedged, position if a UK-based company had () a receivable; and (li) a payable both denominated in CAD. d) Assume a country chooses an independent monetary policy and no restrictions on capital flows. Explain why these are only compatible with a freely floating exchange rate system.

b) What does a convex tax code imply? How does a company benefit from hedging if it faces a convex tax code? If the corporate tax rate is flat, would a firm benefit from hedging?

c) Why does an increase in the (historic) volatility of foreign exchange rates increase the value of foreign currency options?