Question
MFM, a major Canadian food production company, has identified three risks in their business. They import a number of ingredients from the U.S. and incur
MFM, a major Canadian food production company, has identified three risks in their business.
They import a number of ingredients from the U.S. and incur U.S.$ payables each month in the amount of approximately U.S. $200,000.
In addition, they purchase 40,000 pounds of pork from the U.S. each month and have never covered that exposure.
Finally they believe that interest rates will fall and want to look at what can be done to change their interest rate exposure to a floating rate. They have two years remaining on a Cdn. $10 million bond issue.
You are the derivatives analyst at MLM's broker and you have been asked to analyze alternatives to cover these risks - just note the overall strategies and do not worry about specific prices as they will be completed on the day the hedge are executed.
The size of the exposure is important when designing each hedge strategy, as you must determine the number of contracts to hedge as applicable.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started