work. risk sharing agreement discussed in Section (20 Points) 5. CDE Inc., a Frederick, MD based firm, just sold a very

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Work Risk Sharing Agreement Discussed In Section 20 Points 5 Cde Inc A Frederick Md Based Firm Just Sold A Very 1 (121.06 KiB) Viewed 31 times

work. risk sharing agreement discussed in Section (20 Points) 5. CDE Inc., a Frederick, MD based firm, just sold a very sophisticated widget making equipment linational firms can hedge their F/X operating exposure and explain how CAD rather than USD, CFO of CDE is considering several hedging alternatives to reduce the to a Canadian firm for 10 million CAD. The sale was made in May 2022 with the full payment due six months later. Because this is a sizable contract for CDE and because the contract is in exchange rate risk arising from the sale and hired you as a consultant. To help the CFO make a hedging decision you have gathered the following information. The spot exchange rate is 1.2895 CAD/USD The six month forward rate is 1.2889 CAD/USD CDE's cost of capital is 11% The Canadian 6-month borrowing rate is 6.2% The Canadian 6-month lending rate is 3.5% The U.S. 6-month borrowing rate is 5.8% The U.S. 6-month lending rate is 1% . . 0.5% November 2022 put options for 1 million CAD: strike price $1.2800, premium is November 2022 call options for 1 million CAD: strike price $1.2800, premium is 1.0% a. What type of exposure is CDE facing? How much? (2 points) b. If CDE carries out a forward hedge, how much dollars will they receive from this contract in November 2022? (3 points) c. Explain how CDE might carry out a money market hedge. (Just explain each step of the money market hedge - no need to do any calculations.) (10 points) d. What is the dollar value of this contract under the money market hedge? (Now do the calculations.) (10 points) e. CFO would like to consider a hedging strategy using F/X options. Evaluate the outcome of an options hedge. (10 points) f. CFO is brash young heir apparent (and the favorite daughter) to the CEO. Since she became the CFO six months earlier, she has been taking on many risky business propositions that has so far not paid offer In fact , CEO put CFO on notice that any more FIX losses and she will be gone, family or not . Make a hedging strategy recommendation to the CFO. Always keep in mind that no hedging is a valid strategy. Justify your recommendation using a diagram of the various payoff functions. (15 points)