Question
FLex is one of the largest manufacturing companies in the United States. Recently, the company has sent the invoice to one of Canadian company which
FLex is one of the largest manufacturing companies in the United States. Recently, the company has sent the invoice to one of Canadian company which purchased the manufacturing products that costs CAN 200,000 with two months ahead on the delivery date. To hedge the risk in Canadian dollar, Flex may consider purchasing two put options contracts (because each option contract represents 100,000 Canadian dollars). The current Canadian spot rate is $0.8. The first put option contract requires a premium of $0.004, and the exercise price is 6 percent above the spot rate. Meanwhile, an alternative put options is available with two months maturity, with an exercise price of 10 percent above the spot rate, and the premium is $0.01. On the other hand, FLex may choose futures hedge as an alternative hedge instrument. The futures price of the contract for the two months maturity is $0.85. The firm expects that future spot rate would be equals to futures price. Given this expectation. calculate the payoff as the results of the following strategy: - a) Futures hedge (3marks) b) Option hedge (there are three possible outcomes of using option contracts
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