Microsoft Word - Midterm FIN6644_Summer2016 Take-Home.docx

(13 points) A U.S. multinational, Hoola Hoopa, Inc., hired a Canadian IT consulting firm to upgrade its international network. In 6 months when the contract is over, Hoola Hoopa will need 1.5 million Canadian dollars to pay the consultants. The company needs to decide whether or not it should enter into a forward contract to hedge its exchange rate risk. Fill in the answers below using the US$ Equivalent rates listed in the table below.

Country

Canada (Dollar) 1-month forward 3-months forward 6-months forward

U.S. $ Equivalent Mon Fri 0.6879 0.6879 0.6868 0.6869 0.6844 0.6845 0.6803 0.6804

(a) The most recent Canadian dollar spot rate is ______________________ (b) Canadian dollar 6-mo forward rate on Monday is ______________________

(c) What it would cost Hoola Hoopa if the company were to buy Canadian dollars at the spot rate?

(d) What it would cost Hoola Hoopa if it hedged with a forward contract to buy 1.5 million Canadian dollars 6 months later?

(e) Compare the cost of the forward contract, or the hedged position, with the cost of buying the Canadian dollars on the spot market in 6 months. Fill in the table below to show the cost of buying CD$1.5 million at different spot rates, and then calculate Hoola Hoopas potential gains or losses from hedging with a forward contract.

Spot Rate in Unhedged Hedged Potential Gains/losses 6 months Position Position in US$ from Hedge

0.6700

0.6803

0.6900