The Canadian Dollar Hedging

Price forward contract is hedging instrument are well known

and often used as a financial instrument. It has its advantages and
disadvantages both. The main disadvantage therein is the presence
of a shackle contract so that company cant take the advantage of
favorable movements. Its typically used when the company isnt
interest with profit rather than hedging.
Different hedging strategies for Canadian dollars risk are used.
Our calculation is to reduce the total amount paid by General Motors
with respect 1.7 billion CAD cash to the suppliers. First we found
which is the most profitable hedging instrument on 50% hedge ratio
the we estimate the total cost paid in using 75% and 50% hedge
ratio.
We use the example data that given in case, we can estimate
the total cost should be paid by the company using 50% hedge
ratio. The graph shows that the options are more profitable at 1.6
exchange rate (1.6 is the rate where both lines crossing each other)

Opt
ions

Sp

Stri

ot

ke

Ra

Pri

tes

ce
1.5

1.4

667
1.5

1.5

667
1.5

1.6

667
1.5

1.7

667
1.5

1.8

667

Exe

Pre

rcis

miu

Yes
Yes
No
No
No

Actu
al

Gain/

Net

Pay

(Loss)

Payment

76001

14302264

28382

13397502

9255

ment
1428

1
9255

5714
1333

1
9255

3333
1250

1
9255

0000
1176

13284
-

1
9255

4706
1111

50049
-

1111

82729

12605835
11907306
11286391

Forwards
Futur

Hedge

Un-hedged

Forwar

Amount at

Amount at

Spot

d Rate

Forward

Future Spot

Rate

Rate

Rates
1.4

1.5667

6382843

7142857

1.5

1.5667

6382843

6666667

Now we can analyze

the income statement
gain/loss
scenarios

for
for

2
both

50% hedge ratio and

1.6

1.5667

6382843

6250000

1.7

1.5667

6382843

5882353

75% hedge ratio.

The level of loss and

1.8

1.5667

6382843

5555556

gain both are more in

50% hedge ratio as

compared to the hedge ratio of 75% and EPS also volatility is due to
a higher level of uncertainty involved in non hedged amount.

50% Hedge Ratio

Rates
1.627
1.529

Gain/Lo

EPS

ss

Change

44
-47

0.08
-0.09

75% Hedge Ratio

Rates
1.627
1.529

Gain/Lo

EPS

ss

Change

36
-36

0.07
-0.07

Translational risk is usually not hedged by the companies,

although if the impact is significant on the earnings of a company
then hedging its a secure option. Transaction risks should be
hedged if theres high level of volatility in foreign exchange rates as
its in the case of Canadian.