Question
Thriller Inc., a Canadian corporation, buys raw materials from ZhinTao Corporation, a Chinese company, delivering in 3 months time. The value of the contract is
Thriller Inc., a Canadian corporation, buys raw materials from ZhinTao Corporation, a Chinese company, delivering in 3 months time. The value of the contract is 2 million yuan (CNY), paid in Chinese yuan. The current exchange rate is 0.2000CAD/CNY. Thriller Inc. Management is exploring the options to hedge their position, and contacts RBC for advice. RBC has two options for them: (1) enter into a 3-month forward contract at forward rate of 0.2126CAD/CNY. (2) buy a call option with exercise price of 0.2095CAD/CNY expired in 3 months' time with an upfront premium of 0.008CAD for each CNY. Explain the differences between the forward contract and the call option. In this case, which one should Thriller Inc. choose and why?
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