SOLUTION: 1. Nickel Plains of Canada has purchased 500,000 pounds of nickel from Coin Ltd. at US$6.96, payable in 90 days. The current spot rate is 1.3404 ($Can / $U.S.) and the 90-day

Question 634351: 1. Nickel Plains of Canada has purchased 500,000 pounds of nickel from Coin Ltd. at US$6.96, payable in 90
days. The current spot rate is 1.3404 ($Can / $U.S.) and the 90-day forward is 1.3421. The vice-president of
finance at Nickel Plains suggests that the spot rate in three months time will be 1.3333.
Interest rates in Canada are currently 2 percent for 90 days and 1.6 percent in the United States.

a. Outline the various options available to Nickel Plains to handle its foreign exchange exposure.

b. Make a recommendation.

SOLUTIONS

Formulas & Data to complete the reqirements of problem step by step

a. Outline the various options available to Nickel Plains to handle its foreign exchange exposure.

Purchase in three month�s time (90 days):

Amount of nickel 500,000
Price $6.96
Total contract FORMULA

1. Take a chance on the spot rate (at the future date):

Spot rate VALUE
Future cost FORMULA

2. Book a forward contract:

Forward rate VALUE
Future cost FORMULA

3. Money market hedge:

i. Invest 90 day discounted $1,475,000 (to meet contract):
US interest rate VALUE
Discounted amount FORMULA

ii. Convert to $ Canadian at the spot rate:
Spot rate VALUE
Canadian FORMULA

iii. Borrow in Canada at the current interest rates:
CDN. interest rate VALUE
Future cost FORMULA
Pay off loan

b. Make a recommendation

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