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Diamond Shamrock Corp, an American oil refinery and gas station company, is due to pay a Canadian supplier CAD750,000 in three months time. It is
Diamond Shamrock Corp, an American oil refinery and gas station company, is due to pay a Canadian supplier CAD750,000 in three months time. It is now 15 January 2022 (15/1/2022). Relevant data from the foreign currency and money market is given below:
Exchange rates quoted today are: |
Spot rate USD/CAD = 1.2700 - 1.2800 |
One month forward rate USD/CAD = 1.2620 - 1.2750 |
Three-month forward rate USD/CAD = 1.2500 - 1.2670 |
Six-month forward rate USD/CAD = 1.2380 - 1.2600 |
Interest rates:
CAD = 2% - 4%
USD = 6% - 8%
Futures market (CAD62,500 contracts, margins are USD 1,000 per contract) |
March (3) CAD/USD = 0.7900 |
June (6) CAD/USD = 0.8020 |
September (9) CAD/USD = 0.8120 |
Options market (CAD62,500 contracts, premiums are quoted in cents per CAD)
Call Option Put option |
Exercise price June September June September |
0.7900 2.90 3.65 0.20 0.32 |
0.8100 1.60 2.35 1.05 1.80 |
0.8300 0.87 1.10 2.10 2.98 |
Calculate the dollar payment using each type of hedging technique suggested by the information above and determine the best technique for the company.
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