Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_step_2

Step: 3

blur-text-image_step3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Finance questions