Suppose the Canadian Wheat Pool wants to hedge a US dollar payable using futures contracts that trade on the Chicago Mercantile exchange.

Question

Quizplus · Accepted Answer

Since the Canadian Wheat Pool has a US dollar payable, they are exposed to currency risk of the US dollar strengthening against the Canadian dollar. To hedge this risk, they can sell Canadian dollar futures to secure the current exchange rate. If the US dollar strengthens and the Canadian dollar weakens, the Wheat Pool can offset the loss in the payable with a gain in the futures contract. Selling Canadian dollar futures allows the Wheat Pool to lock in a specific exchange rate and protect against currency risk.

Suppose the Canadian Wheat Pool Wants to Hedge a US