You operate a Canadian firm and have just secured a contract to sell 1,000,000 worth of merchandise to a customer in France. The fund will be received in 180 days. You would like to hedge against changes in C$/ FX rate. You observe the following market quotes. Note: To obtain the effective 180-day interest rates, you can simply divide the quoted (per annum) interest rates by two. For example, the effective 180 -day borrowing rate in is 4.55% (=9.10%/2)
You operate a Canadian firm and have just secured a contract to sell 1,000,000 worth of merchandise to a customer in France. The fund will be received in 180 days. You would like to hedge against changes in C$/ 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 borrowing rate in is 4.55% (= 9.10%/2) Spot and Forward FX Contracts 180-day Spot FX rate Forward FX rate US$ 0.9060 - 0.9067/C$ US$ 0.9050 - 0.9063/C$ US$ 1.2489 - 1.2496/ US$ 1.2355 - 1.2370/ C$ 180-day Interest Rates in C$ and Lending (Investment) Rate Borrowing Rate (% annum) (% annum) 6.1% 8.8% 9.1% C$ 6.5% Hint: 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$. You operate a Canadian firm and have just secured a contract to sell 1,000,000 worth of merchandise to a customer in France. The fund will be received in 180 days. You would like to hedge against changes in C$/ 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 borrowing rate in is 4.55% (= 9.10%/2) Spot and Forward FX Contracts 180-day Spot FX rate Forward FX rate US$ 0.9060 - 0.9067/C$ US$ 0.9050 - 0.9063/C$ US$ 1.2489 - 1.2496/ US$ 1.2355 - 1.2370/ C$ 180-day Interest Rates in C$ and Lending (Investment) Rate Borrowing Rate (% annum) (% annum) 6.1% 8.8% 9.1% C$ 6.5% Hint: 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$
