In 30 days, you will receive a large sum of Canadian dollars. The current spot price of American dollars ($) to Canadian is ($/CA$) with a bid price of $0.7500 and an ask price of $0.7510. The 30-day forward rates are bid $0.7415 and ask of $0.7430 You are to hedge the Canadian dollar inflow, considering either forward market or options Premium/CA$ Strike Price Call Put $0.7400 Cents 1.65 0.85 a) State how to hedge in the forward market b) State how to hedge in options market c) Draw a graph showing both forward and options payoffs, please show where the breakeven point is for the options contract d) What does the spot rate need to be in 30 days so that you will receive in USD regardless if you hedge in the market forward or options? e) Based on the probability distribution below that characterizes the relevant spot $/CA$ exchange rate in 30 days $/CA$ Exchange Rate Probability Less than $0.7400 10% $0.7400 to $0.7499 25% $0.7500 and above 65% Total 100

e)Based on your response to part (a) and the above probability data, how would you hedge the Canadian dollar inflow?