Case

Question 1: The Problem

a. Canadian dollars.

b. Pixonix is based in Canada but does a lot of business in the US. Hence, a significant portion of their expenses are in USD although their revenues are in their home currency (CAD). This exposes them to the changes in exchange rate/ exchange rate risk. They are concerned about the future currency value of CAD in respect to the USD. Specifically, they are concerned about USD appreciating or CAD depreciating.

Question 2: Scenario Analysis/Calculations

a. Remaining Unhedged

Scenario I

Unhedged payment C$ = $7,500,000 x C$ 0.90/$ = C$ 6,750,000

Scenario II

Unhedged payment C$ = $7,500,000 x C$ 1.00/$ = C$ 7,500,000

Scenario III

Unhedged payment C$ = $7,500,000 x C$ 1.10/$ = C$ 8,250,000

b. Hedges – Long a Forward Contract

Assumption 1: CAD will depreciate vs. USD

Assumption 2: According to the table given, Bid rate: C$ 0.934160/$, Ask rate: C$ 0.934990/$

Scenario I

Forward Gain/Loss = (0.90 - 0.934990) x 7, 500, 00 = C$ -262,425

Total net payment = 6,750,000 + 262,425 = C$ 7,012,425

Scenario II

Forward Gain/Loss = (1.00 - 0.934990) x 7, 500, 00 = C$ 487,575

Total net payment = 7,500,000 - 487,575 = C$ 7,012,425

Scenario III

Forward Gain/Loss = (1.10 - 0.934990) x 7, 500, 00 = C$ 1,237,575

Total net payment = 8,250,000 - 1,237,575 = C$ 7,012,425

Table 1: Forward vs. Unhedged Position

Expected Spot Rate

in 3 Months | Unhedged

payment C$ | Forward gain/loss C$ | Net Payment C$ |

C$ 0.90/$ | (6,750,000) | (262,425) | (7,012,425) |

C$ 1.00/$ | (7,500,000) | 487,575 | (7,012,425) |

C$ 1.10/$ | (8,250,000) | 1,237,575 | (7,012,425) |

c. Hedges – USD Call Option

Table 2: Option vs. Unhedged Position: Expected Spot Rate in 3 Months C$ 0.90/$

Strike | Premium % | Option

Premium C$ | Option

Payoff C$...