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Question:
(a) Explain and discuss the hedging strategies using futures
(b) Boeing (an American company) delivered on 1st September 2008 an airplane to a Canadian company. Boeing will receive payment of 4 million Canadian dollars in 2 months time that is on 1st November 2008. Fearing a depreciation of Canadian dollars Boeing decides to buy European puts at the price of 2.85 cents/CAD and the strike price is $0.93. The spot price on the 1st of September 2008 is $0.9280/CAD.
(i) Describe how this strategy will allow Boeing to hedge against the depreciation of the Canadian dollar.
(ii) If the spot rate on the 1st November 2008 is $0.8520/CAD, discuss whether Boeing has benefitted from taking position in the options and calculate the benefits/losses.
(iii) Show the hedging strategies involving options if a company who has debts in a currency is anticipating an appreciation of the currency.
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