Do you agree or disagree with the argument of the examples

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Reference no: EM133264805

Question:

Let's say a Canadian corporation has purchased a currency put option to hedge a $100,000 (USD) receivable. The premium is $0.02, the exercise price is $0.87, and the spot rate at the time of maturity is equal to $0.83. The amount received for the Canadian corporation can be found by using this formula: 100,000(0.87-0.02). This would mean the Canadian corporation would receive $85,000.

Speculators example:

Let's say a speculator working for an American corporation purchases a put option on British pounds. Strike price equals $1.63 for $.08 per unit. This pound option is representing 41,270 units. To calculate the gains you would multiply the unit cost by the unit amount which would mean the U.S corporation would receive a profit of 3,301.60.

Do you agree or disagree with the argument of the examples they provide? And Why? Does the examples illustrating the use of forward contracts by hedgers and speculators? If yes, how? If not, why?

A speculator would enter into a currency future contract if they believed that a currency would begin to appreciate. For example, say a speculator though the Japanese Yen was trading at $.68 per share. Speculators saw trends that the Yen would appreciate to $.98 per share. A speculator would buy a futures contract, and when the currency got to its highest point the speculator would then sell the contract in order to make $.30 profit per share.

In regards to a hedger, hedgers want to minimize the fluctuations between currencies. So a hedger could enter into a future contract if they believe the currency will depreciate with time. So if the currency does go below what they bought it for, the hedger will not lose money, and if they buy a future contract for the long position they will be compensated for their "losses".

Do you agree or disagree with the argument of the examples they provide? And Why? Does the examples illustrating the use of forward contracts by hedgers and speculators? If yes, how? If not, why?

Reference no: EM133264805

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