Assume that interest parity exists. Today, the one-year interest rate in Canada is the same as the
Question:
Assume that interest parity exists. Today, the one-year interest rate in Canada is the same as the one-year interest rate in the U.S. Utah Co. uses the forward rate to forecast the future spot rate of the Canadian dollar that will exist in one year. It needs to purchase Canadian dollars in one year. Will the expected cost of its payables be lower if it hedges its payables with a one-year forward contract on Canadian dollars or a one-year at-the-money call option contract on Canadian dollars? Explain.
Step by Step Answer:
The forward contract does not require an option premium The f...View the full answer
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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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