Dalia Ltd, a UK exporter, expects a receipt of 1.7m Canadian dollars (C$) for sure in one year from now. Dalia has no use for C$ currency and will exchange it into sterling (£). Assume that the Canadian dollar’s spot exchange rate now is C$=£0.57, the one-year forward rate is C$=£0.52, and the discount rate is zero. Dalia may receive an additional C$2.5m one year from now if it agrees a deal with a new Canadian customer. The probability of this deal being agreed is 0.7. If the deal is not agreed (probability 0.3) Dalia receives no payment from the new customer. Suppose for parts (a) and (b) that the spot rate in one year is C$=£0.50. ⦁ Assume Dalia chooses to enter into a forward exchange contract for the maximum possible receipt of C$4.2m. What actions will the firm take and what will be the value of its net receipts in £, if in one year: ⦁ the new deal is agreed? ⦁ the new deal is not agreed?
Dalia Ltd, a UK exporter, expects a receipt of 1.7m Canadian dollars (C$) for sure in one year from now. Dalia has no use for C$ currency and will exchange it into sterling (£). Assume that the Canadian dollar’s spot exchange rate now is C$=£0.57, the one-year forward rate is C$=£0.52, and the discount rate is zero.
Dalia may receive an additional C$2.5m one year from now if it agrees a deal with a new Canadian customer. The probability of this deal being agreed is 0.7. If the deal is not agreed (probability 0.3) Dalia receives no payment from the new customer.
Suppose for parts (a) and (b) that the spot rate in one year is C$=£0.50.
⦁ Assume Dalia chooses to enter into a forward exchange contract for the maximum possible receipt of C$4.2m. What actions will the firm take and what will be the value of its net receipts in £, if in one year:
⦁ the new deal is agreed?
⦁ the new deal is not agreed?
What will be the expected value of Dalia’s net receipt in £?
⦁ Assume now that Dalia chooses to hedge the certain receipt of C$1.7m using a forward exchange contract, and the uncertain receipt of C$2.5m using a put option with an exercise price of £0.55 and a premium of £0.015 per C$.
What will be the value of its net receipts in £ from this strategy, if in one year:
⦁ the new deal is agreed?
⦁ the new deal is not agreed?
What will be the expected value of Dalia’s net receipt in £?
⦁ Suppose now that the spot exchange rate in one year is C$=£0.54. What will be the new expected values in £ of the strategies in parts (a) and (b)? Have they changed?
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