Calculating the Cost of a Forward Contract Exercise 8 A U.S. multinational, Hoola Hoopa, Inc., hired a Canadian IT consulting firm to upgrade its internal network. In 6 months when the contract is over, Hoola Hoopa will need 1.5 million Canadian dollars to pay the consultants. The company needs to decide whether or not it should enter into a forward contract to hedge its exchange rate risk. Fill in the answers below using the US $ Equivalent rates listed in the table below. U.S. $ Equivalent Fri Country Canada (Dollar) 1-month forward 3-months forward 6-months forward Switzerland (franc) 1-month forward 3-months forward 6-months forward U.K. (Pound) 1-month forward 3-months forward 6-months forward Mon 0.6879 0.6868 0.6844 0.6803 0.7197 0.7203 0.7215 0.7232 1.5734 1.5703 1.5644 1.5555 0.6879 0.6869 0.6845 0.6804 0.7179 0.7183 0.7192 0.7213 1.5715 1.5783 1.5624 1.5536 Currency per U.S.S Mon Fri 1.4537 1.4537 1.4560 1.4558 1.4611 1.4609 1.4699 1.4697 1.3895 1.3930 1.3883 1.3922 1.3860 1.3904 1.3827 1.3864 0.6356 0.6363 0.6368 0.6376 0.6392 0.6400 0.6429 0.6437 Source: The Wall Street Journal, Tuesday April 15, 2003, p. C14. a. Canadian dollar spot rate: b. Canadian dollar 6-months forward rate: c. What it would cost Hoola Hoopa if the company were to purchase the Canadian dollars spot on April 15, 2003: purchase 2003: cost Hoola Hoopa if it hedged with a forward contract on April 15, 2003 to 1.5 million Canadian dollars 6 months later on October 15, Compare the cost of the forward contract, or the hedged position, with the cost of buying the Canadian dollars on the spot market on October 15, 2003. Fill in the table below to show the cost of buying C$1.5 million at different spot rates, and then calculate Hoola Hoopa's potential gains or losses from hedging with a futures contract. Spot Rate on Oct 15, 2003 Unhedged Position Hedged Position Potential Gains/Losses in US$ from Hedge 0.6521 0.6700 0.6803 0.6850 0.6900 (Note: The Company's unhedged position is the cost in USS of C$1.5 million at the various spot rates given for Oct 15, 2003. The Company's hedged position is the cost of a forward contract on April 15. 2003 to purchase 1.5 million Canadian dollars 6 months later on October 15, 2003.) Calculating the Cost of a Forward Contract Exercise 8 A U.S. multinational, Hoola Hoopa, Inc., hired a Canadian IT consulting firm to upgrade its internal network. In 6 months when the contract is over, Hoola Hoopa will need 1.5 million Canadian dollars to pay the consultants. The company needs to decide whether or not it should enter into a forward contract to hedge its exchange rate risk. Fill in the answers below using the US $ Equivalent rates listed in the table below. U.S. $ Equivalent Fri Country Canada (Dollar) 1-month forward 3-months forward 6-months forward Switzerland (franc) 1-month forward 3-months forward 6-months forward U.K. (Pound) 1-month forward 3-months forward 6-months forward Mon 0.6879 0.6868 0.6844 0.6803 0.7197 0.7203 0.7215 0.7232 1.5734 1.5703 1.5644 1.5555 0.6879 0.6869 0.6845 0.6804 0.7179 0.7183 0.7192 0.7213 1.5715 1.5783 1.5624 1.5536 Currency per U.S.S Mon Fri 1.4537 1.4537 1.4560 1.4558 1.4611 1.4609 1.4699 1.4697 1.3895 1.3930 1.3883 1.3922 1.3860 1.3904 1.3827 1.3864 0.6356 0.6363 0.6368 0.6376 0.6392 0.6400 0.6429 0.6437 Source: The Wall Street Journal, Tuesday April 15, 2003, p. C14. a. Canadian dollar spot rate: b. Canadian dollar 6-months forward rate: c. What it would cost Hoola Hoopa if the company were to purchase the Canadian dollars spot on April 15, 2003: purchase 2003: cost Hoola Hoopa if it hedged with a forward contract on April 15, 2003 to 1.5 million Canadian dollars 6 months later on October 15, Compare the cost of the forward contract, or the hedged position, with the cost of buying the Canadian dollars on the spot market on October 15, 2003. Fill in the table below to show the cost of buying C$1.5 million at different spot rates, and then calculate Hoola Hoopa's potential gains or losses from hedging with a futures contract. Spot Rate on Oct 15, 2003 Unhedged Position Hedged Position Potential Gains/Losses in US$ from Hedge 0.6521 0.6700 0.6803 0.6850 0.6900 (Note: The Company's unhedged position is the cost in USS of C$1.5 million at the various spot rates given for Oct 15, 2003. The Company's hedged position is the cost of a forward contract on April 15. 2003 to purchase 1.5 million Canadian dollars 6 months later on October 15, 2003.)