CanComp has a contract to deliver a large computer system to a South African company in one year and would like to hedge the currency risk. CanComp will receive payment of R3.5 million (the currency of South Africa is the rand) in one year for the computer system. CanComp can borrow and lend in Canada at 3 percent per annum and can borrow and lend in South Africa at 7 percent per annum. Assume the borrowing and lending is risk free. The current spot exchange rate is C$/Rand .35 and there is no one-year forward exchange rate.
Describe how CanComp can hedge the currency risk by creating a synthetic forward con-tract. Demonstrate that your synthetic forward contract hedges the currency risk. Assume all investments are risk free.

  • CreatedFebruary 25, 2015
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