How marsden ltd could use bear spread to hedge its position

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Reference no: EM13935833

Hedging with a bear spread. (See the chapter appendix.) Marsden Ltd has customers in Canada and frequently receives payments denominated in Canadian dollars (C$). The current spot rate for the Canadian dollar is £0.50. Two call options on Canadian dollars are available. The first option has an exercise price of £0.47 and a premium of £0.02. The second option has an exercise price of £0.49 and a premium of £0.01. Marsden Ltd would like to use a bear spread to hedge a receivable position of C$50 000, which is due in one month. Marsden is concerned that the Canadian dollar may depreciate to £0.48 in one month.

a. Describe how Marsden Ltd could use a bear spread to hedge its position.

b. Assume the spot rate of the Canadian dollar in one month is £0.48. Was the hedge effective?

Reference no: EM13935833

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