Evaluate alternative hedging strategies, Financial Management

Assignment Help:
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.

Related Discussions:- Evaluate alternative hedging strategies

What are classes of institutions that issue bonds in the usa, What are the ...

What are the main classes of institutions that issue bonds in the USA? There are three major classes of institutions which issue bonds in the USA: national governments, local g

Finance, Ask questiSuggestion regarding Credit limit. Should it be approved...

Ask questiSuggestion regarding Credit limit. Should it be approved or not, what should be the amount of credit limit that electronics give to Booth Plastics.

What is a sunk cost, What is a sunk cost?  Is it relevant when evaluating a...

What is a sunk cost?  Is it relevant when evaluating a proposed capital budgeting project?  Explain. A sunk cost is a cash flow that has already takes placed, or that will take

Working capital management, what are the objectives of working capital mana...

what are the objectives of working capital management

Financial plan development, You need to tick all the boxes below to acknowl...

You need to tick all the boxes below to acknowledge that your Statement of Advice complies will all the requirements. This checklist needs to be appended to the cover sheet of the

SES, Scenario: You are still a consultant for the Excellent Consulting Grou...

Scenario: You are still a consultant for the Excellent Consulting Group. You have completed the first assignment, developing and testing a forecasting method based on linear regres

Audit opinion, Clean Opinion - AUDIT opinion not qualified for any material...

Clean Opinion - AUDIT opinion not qualified for any material scope restrictions nor departures from GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Also called UNQUALIFIED OPINION

Show the costs of investment in receivables, Q. Show the Costs of Investmen...

Q. Show the Costs of Investment in Receivables? Costs of Investment in Receivables: - When a firm sells goods or else services on credit it has to bear numerous types of costs.

Calculate the maximum amount, Determine the amounts to be recognised in pro...

Determine the amounts to be recognised in profit or loss and in other comprehensive income in respect of the property for the year ended 31 December 2010.   Evaluate the compliance

Leverage, evaluate the importace of leverage in financial management of a s...

evaluate the importace of leverage in financial management of a small scale company

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd