Comparing forward hedge and money market hedge

Reference no: EM133332195

Question: Suppose that you (i.e., company XYZ) are a US-based importer of goods from Canada. You expect the value of the Canada dollar to increase against the US dollar over the next 6 months. You will be making payment on a shipment of imported goods (CAD100,000) in 6 months and want to hedge your currency exposure. The US risk-free rate is 5% and the Canada risk-free rate is 4% per year. The current spot rate is $1.25/CAD, and the 6-month forward rate is $1.3/CAD. You can also buy a 6-month option on Canadian dollars at the strike price of $1.4 /CAD for a premium of $0.10/CAD.

By comparing forward hedge and money market hedge, which strategy (forward or money market hedge) would you prefer to use?

Also: Provide a brief reason why the two numbers from forward and MMH hedge are not the same.

Reference no: EM133332195

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