CanComp, a Canadian computer manufacturer, will be delivering a large computer system to a German firm in six months. CanComp expects to receive payment of US$1.5 million at that time. Currently the spot rate is C$1.15 per US$ and the six-month forward rate is C $1.25 per US$.
a. What risks does CanComp face with the sale of the computer system?
b. Describe how CanComp can hedge the currency risk.
c. Determine CanComp's profit or loss on the hedge if the actual spot rate in six months is:
i. C $0.75 per $US
ii. C $1.50 per $US
d. Given your answers to (a) and (b), should CanComp hedge? Hint: Remember ex ante versus ex post.