On Friday, October 1st , Furnicom sells furniture products to Canadian companies, Carrier Ltd, at the price of CD$ 500,000 and will receive the revenue on December 31st . The exchange rate as of Oct 1st, is $0.8300/CD $ and the currency expert anticipates that Canadian dollar will be fluctuating within the range of $0.79 - $0.90 within the next three months. To offset any potential losses and minimize the foreign exchange rate risk regarding to the value of the U.S. dollar receivable, Furnicom is considering the use of derivatives instrument and money market hedge to hedge its exposure. Given the following information: 3 Month Forward and Future Quotation of CD$ BID-ASK Contract Size Maturity Date Future Rates $0.8322 - 325 100,000 unit December 31st Forward Rate $0.8422 - 445 - December 31st 3 Month Option Quotation: Contract Size 50,000 unit of CD$ Option #1 Option #2 Option #3 Option #4 Exercise Price $0.90 $0.89 0.87 0.92 Premium per unit 0.025 0.035 0.017 0.015 Types Call Put Put Call CD$ $ One Year Deposit Rate 4.00% 3.75% One Year Borrowing Rate 5.5% 4.75%

a) As a financial manager of Furnicom, you have been assigned the task of choosing among three possible strategies: (1) hedged by using forward (2) hedge by using future contract, (3) hedge by using option contract and (4) hedged by using money market. Given the information on the possible spot rate that could occur at the end of December. Determine the amount of U.S. Dollar receivable for each hedging strategy under each possible spot rate.

Case 1: S = 0.875$/C$

Case 2: S = 0.830$/C$

b) Determine the optimal hedging strategy for each case.

c) Furnicom also holds an asset in UK and faces the following scenario: Probability State 1 25% State 2 50% State 3 25% Spot $2.2/ $2.00/ $1.80/ Value of asset in UK 3,000 2,500 2,000 i. Estimate your exposure to foreign exchange rate risk (Beta) ii. Compute the variance of the dollar values of your UK asset that is attribute to the exchange rate uncertainty. iii. How would you hedge this exposure? Given the forward rate of $2.00/ . What will be the dollar values of the UK after hedge? Compute the variance after hedge.