Sushima Company will be paid 500,000 Canadian dollars (C$) in 90 days and is trying to determine
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Question:
Sushima Company will be paid 500,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Sushima has developed the following probability distribution for the Canadian dollar:
Possible Value of Canadian Dollar in 90 Days Probability
U.S.$0.74 15%
0.77 25%
0.80 35%
0.82 25%
The 90-day forward rate of the Canadian dollar is US$0.775. If Sushima implements a forward hedge, what is the probability that hedging will be better for the firm than not hedging?
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