BBA FIN74000-How should a Canadian company importing goods

Question #1 (5 marks)How should a Canadian company importing goods from the United States and paying U.S. dollars hedge its exchange rate risk?a. Sell forward contracts on U.S. dollarsb. Buy call options on Canadian dollarsc. Sell put options on Canadian dollarsd. Buy futures on U.S. dollarsWhich of the following statements about interest-rate risk management is true?a. A financial institution with a negative gap can reduce its interest-rate risk by making the gap positive.b. A financial institution can eliminate its interest-rate risk by making the duration of assets lower than the duration of liabilities.c. An immunized portfolio is protected from interest-rate changes until the maturity of the assets and liabilities.d. A financial institution can substantially decrease interest-rate risk by making the value of rates sensitive assets equal to the value of rate-sensitive liabilities.Which of the following statements about futures and forward contracts is true?a. Futures and forward contracts require that the buyer/seller of the contract deposit the margin with the clearing house.b. On the delivery date, the holder of a long position in a forward contract makes a profit if the spot price is greater than the delivery price.c. Forward contracts can be closed out before delivery by making an identical but opposite trade on the exchange.d. The buyer of a futures contract pays the agreed-upon futures price on the trade date.Which of the following statements about hedging with futures contracts is false?a. A long hedge gives the buyer of the futures contract the obligation to buy an asset at a future date at an agreed price.b. With a direct hedge, the asset being hedged and the asset underlying the futures contract are the same.c. With a cross-hedge, the asset underlying the futures contract is different from the asset that is being hedge.d. A hedger who uses futures contracts to hedge must make or take delivery of the underlying asset on the delivery date.Question 2 (12 marks)On April 1, Western Golf Links (WGL), a golf course supply company based in Canada, purchased US$5.0 million in merchandise and supplies from Higher Recreation (HR), which is based in the United States. HR informed WGL that the invoice for the order in U.S. dollars would have to be paid no later than 30 days after the purchase. Currently, the Canadian dollar is trading at US$0.9946 in the spot market. WGL’s expected revenue from selling the merchandise and supplies to its customers is a total of C$8.3 million.WGL has no other incremental costs related to this purchase, and its effective corporate tax rate is 35%. The quoted interest rate in the United States for one month (30 days) is 3.28% and in Canada is 3.81%.Requireda. What type of treasury risk does WGL face in this transaction? Briefly explain how this risk arises. (3 marks)b. Based on the cost of the purchase and the current spot exchange rate, what gross and net profit margins are anticipated from this purchase? (6 marks)c. WGL’s management decides to hedge the exchange rate risk using a futures contract on C$ that is traded on the Montreal Futures Exchange with a size of US$100,000 and delivery in 60 days. Determine how WGL will hedge its risk by calculating the number of US$ futures contracts it will need. (3 marks)

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