Evaluate alternative hedging strategies, Financial Management

Peak Inc. needs to order Canadian raw materials to use in its production process. The Canadian exporter typically invoices Peak in Canadian dollars. Assume that the current exchange rate for the Canadian dollar is $0.73/C$ and Peak needs C$100,000 in 90days. Two call options for Canadian dollars with expiration dates in three months and the following additional information are available:



Call option 1 premium on Canadian dollars =$0.015

Call option 2 premium on Canadian dollars =$0.008

Call option 1 strike price =$0.73

Call option 2 strike price =$0.75

One option contract represents C$50,000.

Peak can either (a) buy call options with the lower strike price, or (b) construct a bull strategy that involves buying the call option with the lower price and simultaneously writing the call option with the higher strike price. Further assume that sport exchange rate at the option expiration date is any of the following: $0.70, $0.73, $0.75, and $0.80.

Required:

a) Evaluate both hedging strategies relative to an unhedged position.

b) Repeat the exercise assuming that the spreader writes the option with the lower strike price and buys the option with the higher strike price. Note that it is the case of currency bear spread.
Posted Date: 12/20/2014 2:41:53 PM | Location :







Related Discussions:- Evaluate alternative hedging strategies, Assignment Help, Ask Question on Evaluate alternative hedging strategies, Get Answer, Expert's Help, Evaluate alternative hedging strategies Discussions

Write discussion on Evaluate alternative hedging strategies
Your posts are moderated
Related Questions
Q. Show the Disadvantages of adjusted discount rate? (1) The risk premium rates resolute under this method are arbitrary. Therefore this method mayn't give objective results.

Citilink has just completed its 2010/11 management accounts. The directors are going to review the financial statements in the next board meeting. You have to prepare a FINANCIAL

CORPORATE GOVERNANCE Corporate governance can be stated in different ways, for example: The Private Sector Corporate Governance Trust (PSCGT) defines that corporate governan

Bond Indenture An indenture builds the formal conditions of a lending relationship between a borrower and a lender. It is a written record, and it outlines most important func

Explain about the Interest payments Debenture interest is generally paid semi-annually however annual payments aren't uncommon.  Usually there are registered debentures on whic

Examine the difference between Explicit Cost and Implicit Cost Cost of capital can be either implicit cost or explicit. Explicit cost of any source of capital is the discount r

QUESTION (a) Describe briefly the main security measures to protect E-Banking systems and ensure secure E-Banking transactions. (b) (i) What is a digital certificate? (ii

Presently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The three-month interest rate is 8.0% per year in the U.S. and 5.8% per year in t

Why are trend analysis and industry comparison important to financial ratio analysis? Trend analysis assists financial analysts and managers see whether a company's current fin

a) Cultural exports are the commercial transfer of values and ideas from one country to another. Canned crab meat is a popular local fragility in Thailand and Viya Crab Products Co