Your firm will be importing a large order of its inputs from the United States in six months and is concerned that the Canadian dollar might fall against the U.S.dollar over that time.To hedge your risk,you decide to enter into a currency forward contract to purchase 500,000 USD at a rate of 1.0232 CAD/USD.If the spot exchange rate in six months' time ends up being 0.9967 CAD/USD,what is your gain or loss from hedging compared to remaining unhedged?

Question

Quizplus · Accepted Answer

If the firm had remained unhedged, and the spot rate in six months were 0.9967 CAD/USD, it would have paid 500,000 USD x 0.9967 CAD/USD = 498,350 CAD. 
However, since the firm entered into a currency forward contract to purchase 500,000 USD at a rate of 1.0232 CAD/USD, it will pay 500,000 USD x 1.0232 CAD/USD = 511,600 CAD.
The loss from hedging is therefore 511,600 CAD - 498,350 CAD = 13,250 CAD, which is option (D).

Your Firm Will Be Importing a Large Order of Its