You work for Shrad Ltd (a small Canadian importing firm). Shrad Ltd is interested in having your help to manage the exchange rate exposure on its foreign currency transactions. In your first month the firm agrees to buy goods from a US supplier. Payment of US$10,000,000 is to be made in 90 days. To help with your decisions, you obtain the following information from the international money markets. Exchange Market Spot (C$/US$1) 1.5870 / 1.5886 Forward (C$/US$1) 90 days 1.5898 / 1.5908 Money Market Rates (annual) 90 day C$ interest rates 1.575 / 1.545% 90 day US$ interest rate 1.200 / 1.000% Over the counter options 90 day options on C$ with strike price of C$1.60/US$1: Premium C$50,000 for a US$10million contract. Use 90 and 360 days in your calculations. i. ii. Determine the C$ value of the US$ payable if you lock in this amount using a forward contract. Describe how Shrad Ltd could construct a money market hedge for this situation. Present and explain your calculations in detail. Draw a diagram that illustrates the risk profile of the underlying risk facing Shrad Ltd, the forward contract and the option contract (y axis effective revenue, x axis C$/US$). Determine the exchange rate, C$/$, at which the option hedge would produce a better outcome for the firm than the forward hedge and also the exchange rate at which the option hedge would produce a better outcome than being unhedged. 111