CanGold Mining Company borrowed €100 million in France at an annual interest rate of 3.5 percent. The principal plus interest is due in one year. CanGold used the funds to purchase machine parts in Germany for use in its Indonesian gold mine. In one year, the mine is expected to produce 1 million ounces of gold. Gold is sold on the world market in U.S. dollars.
CanGold would like to hedge its currency and commodity risk. The CFO of CanGold has been quoted the following forward contracts:
i. One year C$/euro forward exchange rate: 1.60
ii. One year C$/US$ forward exchange rate: 1.05
iii. One year US$/euro forward exchange rate: 1.10
iv. One year gold forward contract: US$250 per ounce
Design two hedging strategies for CanGold so that CanGold has profit in C$. Which strategy is better?

  • CreatedFebruary 25, 2015
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