BMC Corporation, an Australian company, has to pay CAD420,000 for an import consignment in six months to a Canadian company.
BMC Corporation, an Australian company, has to pay CAD420,000 for an import consignment in six months to a Canadian company. Depending on its needs, BMC can either borrow or deposit in both the Australian dollar (AUD) and the Canadian dollar (CAD). The existing spot rate of the CAD is AUD 1.2160/CAD. The six-month forward rate of the CAD is AUD 1.2280/CAD. The following additional information has also been provided;
Forecasted foreign exchange rates for the next six months under three different scenarios are given below.
The current commercial banks' annual lending and deposit interest rates are:
Assume that 06-Month put options on CAD are available, with an exercise price of AUD 1.1850/CAD and a premium of AUD 0.06 per unit and 6-months call options on CAD are available with an exercise price of AUD 1.2025/CAD and a premium of AUD0.05 per unit.
You are required to:
- You are required to estimate the cash flow positions of BMC under not-hedge, forward hedge money market hedge and option hedge and to select the best alternative course of action
- Explain how the put option contracts can be used to hedge the CAD payables. (explain, calculations are not required)?