Hedging Transaction Exposure that you Ebony's Electronics Inc. expects to need C$1,000,000 in one year to pay various suppliers. Assume the existing spot rate of the Canadian dollar is US$0.70 and one-year forward rate of the Canadian dollar is US$0.72. Furthermore, the probability distribution for the future spot rate of the Canadian dollar in one year have gathered is as follows: Future Spot Rate Probability US$0.67 10% 0.71 20 0.73 40 0.77 30 You have researched options and found one-year put options on Canadian dollars are available, with an exercise price of US$0.73 and a premium of US$0.04 per unit, and one-year call options on Canadian dollars are available with an exercise price of US$0.70 and a premium of US$0.03 per unit. You have access to the following money market rates (and determined they are equally-risky between countries): U.S. Canada Deposit rate 3% 2% Borrowing rate 4 3 Given all the above information, evaluate and determine which is the most appropriate hedge: forward, money market or options. Defend your choice thoroughly. Once you have determined this optimal hedge, then consider the possibility of not hedging; justify your recommendation to Ebony. Hedging Transaction Exposure that you Ebony's Electronics Inc. expects to need C$1,000,000 in one year to pay various suppliers. Assume the existing spot rate of the Canadian dollar is US$0.70 and one-year forward rate of the Canadian dollar is US$0.72. Furthermore, the probability distribution for the future spot rate of the Canadian dollar in one year have gathered is as follows: Future Spot Rate Probability US$0.67 10% 0.71 20 0.73 40 0.77 30 You have researched options and found one-year put options on Canadian dollars are available, with an exercise price of US$0.73 and a premium of US$0.04 per unit, and one-year call options on Canadian dollars are available with an exercise price of US$0.70 and a premium of US$0.03 per unit. You have access to the following money market rates (and determined they are equally-risky between countries): U.S. Canada Deposit rate 3% 2% Borrowing rate 4 3 Given all the above information, evaluate and determine which is the most appropriate hedge: forward, money market or options. Defend your choice thoroughly. Once you have determined this optimal hedge, then consider the possibility of not hedging; justify your recommendation to Ebony