A Canadian firm is required to make a payment of $1.75 million in 60 days. The spot exchange rate is 1.2690. The 60 day interest rate on US dollars is 0.85%; the 60 day interest rate on Canadian dollars is 0.55%. Sixty day forward contracts on C$ are available with a forward exchange rate of 1.2685. Call and put options on the C$ are available with strike prices of 0.7850 or 0.7900. For all of the following, be as specific as possible: a. How would the firm hedge the risk associated with the payment using a money market hedge? b. How would the firm hedge the risk associated with the payment using a forward contract? c. How would the firm hedge the risk associate with the payment using foreign exchange options? d. What is the risk associated with the payment called?
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