Clearwater Seafoods is a Nova Scotia-based publicly traded company harvesting, processing and selling a variety of shellfish and ground fish species. It sells over 80 million pounds of seafood annually to customers in US. US-based customers pay Clearwater in US dollars. The majority of Clearwater's employees are Canadian citizens and permanent residents living in Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador. 

 

 

A) Is Clearwater a buyer or seller of US dollars, that is, does Clearwater generate revenues or incur expenses in US dollars? To which risk, high value or low value of US dollar, is Clearwater exposed? Draw a risk profile for Clearwater to illustrate your answer. Please mark both the horizontal and vertical axes of all your charts in this part and the following parts. In what shape/position (upward, downward, flat or vertical) would Clearwater desire the risk profile curve to be?

 

B) Assuming that Clearwater has decided to hedge against the risk identified in Part how can it use forward or futures contracts, that is, should it buy or sell such contracts on US dollars? Draw a diagram to illustrate Clearwater's payoff from its position (buying or selling) in forward/futures contracts.

 

C) Now, draw a chart to illustrate Clearwater's net position as a result of this forward/futures hedging strategy, that is, place the risk profile and the forward or futures payoff profile together in one diagram. Do you get the shape/position that Clearwater desires its risk profile curve to be as you answered?

 

D) How can Clearwater use options to hedge against this risk? Should it buy calls or puts on US dollars? Draw a chart to illustrate the payoff from this (buying calls or puts) option position (ignoring the costs of options) and Clearwater's net position as a result of this option hedging strategy.

 

E) Which hedging program, forward/futures or options, is better? Why? What may hinder Clearwater from adopting this better program?

Answer rating: 100% (QA)

A Clearwater Seafoods is a seller of US dollars since it generates revenues in US dollars Clearwater is exposed to highvalue risk of US dollars as a s... View the full answer