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the future price of the Canadian dollar would in effect be set today.
This type of hedge ensured that whatever the spot rate in the future
might turn out to be, the effective price paid for the shipment of
goods would still be that which was agreed upon at the time the
forward contract was established. For example, the exchange rate at
the time of the Dec. 2005 order between the USD and CAD was 1.17
and the three month forward rate was 1.1590 for transactions
valued at $ 1 million or more. Note the bid price is used in this
example because St. Louis Chemical would be selling US dollars and
receiving Canadian dollars. While a bank might quote a forward rate
for a smaller amount, the most competitive forward rates are for
larger transactions. If available, St. Louis Chemical would agree to
buy C$300,000 at the time the invoice is due at an agreed upon rate
today (regardless of the spot rate in the future) and use the
Canadian dollars purchased from the bank to pay the Canadian
supplier.
7. Describe the specific details of a Canadian dollar futures contract.
Propose a Canadian dollar futures contract hedge that can be used
to eliminate the exchange rate risk associated with the Dec. 2005
order valued at C$300,000.
-The Dec. 2005 spot rate is 1.17CAD / 1USD (indirect quote) or
0.8547USD/ 1CAD (direct quote).
- A March 06 Futures contract is quoted as 0.8620 (direct quote)
- A June 06 Futures contract is quoted as 0.8641 (direct quote)
- A September 06 Futures contract is quoted as 0.8659 (direct
quote)
The purchase of C$300,000 worth of specialty chemicals by St. Louis
Chemical invoiced in Canadian dollars has exposed them to a
"natural short" position in Canadian dollars for 90 days. In order to
remove the currency risk, St. Louis Chemical must enter into a "long
hedge" position in Canadian dollars of equal value. A futures
contract hedge is provided by an instrument sold on the Chicago
Mercantile Exchange (CME). Quotations for Canadian dollar futures
are given as direct quotes. Futures contracts are established
through a member of the futures exchange, usually a broker.
Currency futures come in standard contract sizes (each Canadian
dollar futures contract is for 100,000 Canadian dollars) and standard
maturity dates (the third Wednesday of March, June, September,
and December).
In order to trade on the futures market, the client must open and
maintain a margin account with the broker. The current margin
requirements on the Canadian dollar include an initial margin of $