Part A

A Canadian company is planning on using a money market hedge to hedge its receivables of 350,000 euros due in 365 days.

The current deposit rate on the euro is 2% and the deposit rate for the Canadian is 2%.

The lending rate for the euro is 6% and the Canadian lending rate is 5%.

The current spot rate for the euro is 1.51, the future spot rate is expected to be $1.67, and the forward rate is 1.53. The receivable is due in 365 days.

Calculate how much the company will receive using the money market hedge? 5 marks

Part B

Calculate how much the company will receive using an option contract to hedge its receivables of 350,000 euros due in 365 days.

A call option exists on euro with an exercise price of $1.68, with a premium of $.04, and a 365-day expiration date. A put option exists on the euro, with an exercise price of $1.66, a premium of $.03, and a 365-day expiration date. The current spot rate for the euro is 1.51, the future spot rate is expected to be $1.69, and the forward rate is 1.53.

Calculate how much the company will receive using an option contract? 4 marks

Which is beneficial for the company? 1 mark