Q3 (30%) You operate a Canadian firm and your firm will be receiving 1,000,000 from a European customer in 180 days. You would like to hedge against changes in C$/ FX rate. You observe the following market quotes. Note: To obtain the effective 180-day interest rates, you can simply divide the quoted (per annum) interest rates by two. For example, the effective 180-day financing rate in is 1.75% (= 3.5%/2). Spot and Forward FX Contracts Spot FX rate 180-day forward FX rate US$ 0.8001 - 0.8023/C$ US$ 0.8056 -0.8088/C$ US$ 1.1401 1.1432/ US$ 1.1570 1.1592/ C$ 180-day Interest Rates in C$ and Lending (investment) Financing rate rate (% annum) (% annum) C$ 4.2% 5.0% 2.9% 3.5% In answering this question, you might find it easier to first calculate the cross rates between C$ and . (a) Based on the above quotations, is there any arbitrage profit opportunity from violating IRP? Show your calculations and explain the results. (b) What is the hedged C$ receivable in 180 days using a forward market hedge? Give your answer to the nearest C$. (c) Outline the borrowing, lending, and spot FX exchange strategies in order to accomplish a money market hedge. What is the hedged C$ receivable in 180 days using the money market hedge? Give your answer to the nearest C$. 2 Q3 (30%) You operate a Canadian firm and your firm will be receiving 1,000,000 from a European customer in 180 days. You would like to hedge against changes in C$/ FX rate. You observe the following market quotes. Note: To obtain the effective 180-day interest rates, you can simply divide the quoted (per annum) interest rates by two. For example, the effective 180-day financing rate in is 1.75% (= 3.5%/2). Spot and Forward FX Contracts Spot FX rate 180-day forward FX rate US$ 0.8001 - 0.8023/C$ US$ 0.8056 -0.8088/C$ US$ 1.1401 1.1432/ US$ 1.1570 1.1592/ C$ 180-day Interest Rates in C$ and Lending (investment) Financing rate rate (% annum) (% annum) C$ 4.2% 5.0% 2.9% 3.5% In answering this question, you might find it easier to first calculate the cross rates between C$ and . (a) Based on the above quotations, is there any arbitrage profit opportunity from violating IRP? Show your calculations and explain the results. (b) What is the hedged C$ receivable in 180 days using a forward market hedge? Give your answer to the nearest C$. (c) Outline the borrowing, lending, and spot FX exchange strategies in order to accomplish a money market hedge. What is the hedged C$ receivable in 180 days using the money market hedge? Give your answer to the nearest C$. 2
