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A US firm has net receivables of 500,000 CAD in three-month's time as compensation for work undertaken.

The

current spot rate is USD/CAD 0.9772/0.9737

Interest rates in Canada are currently 1.5% for investing and 4% for borrowing

U.S interest rates are 0.5% for investing and 2% for borrowing

all interest rates are stated as nominal annual terms

The U.S firm wishes to implement a money market hedge

a) in which currency should the firm invest in and which should it borrow ?

b) how much should they invest ?

c) how much should they borrow ?

d) what will the future asset be from the investment made ?

e) including the hedge what will be the effective rate of exchange (USD/CAD) ?

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