Case Study 3433

This case study discusses the current exchange rate fluctuation and provides alternative solutions to the problem. It also analyzes the impact of two hedging strategies and suggests the best choice for the company. The study includes references to support the analysis.

1Running head: CASE STUDY 3433
Case Study 3433
Author’s Name
Institutional Affiliation

2CASE STUDY 3433
Case Study 3433
1. Current Exchange Rate Fluctuation
Based on the case scenario, it can be identified that the Cain is concerned regarding
the high fluctuation rate of the Canadian dollar. It has been observed that the CAD$ has
increased by 7% last month. Hence, the chance of increment exists in this scenario. For any
reason, this rate of stock increment price can be decreased. However, the rate will stabilize
again after a period of time. Based on the above information about US$ fluctuations, Cain at
least waits for a month. Hence, the risk of price decrement can be considered as a major issue
for Cain. Her position is for the long period of time, as it can help in generating the expected
profit from the U.S purchase. A chance of price increment also arises, wherein she has to be
more conscious about put and call option so that return can ensure the organizational cost of
US$7.5 million.
2. Alternative Solutions to the Problem
With intention of resolving the aforementioned issue, Cain may adopt call, put,
hedging strategies, and the un-hedged position strategies (Evans, 2011; Broll, Welzel, &
Wong, 2008): Based on the situation mentioned in the case, Cain must implement the call
option so that cost of the organization can be paid (Dejanovski, 2014). It has been observed
that the value of CAD$ has been increased and US$ has decreased. Hence, a high volume of
stock can be purchased at a low price and sell it at a higher price in January. With respect to
determine alternative solutions, Cain can further implement the strategy of a call option for
US$7.5 million so that the organization can pay off reasonably. Besides, Cain can also adopt
hedging strategies or the un-hedged position, which can also help in increasing her
company’s sales.
3. Impact of the Two Hedging Strategies
With respect to the above-mentioned factors and situations, certain solutions have
been presented below with respect to two hedging strategies or the un-hedged position. The
case has provided two strategies, which Cain wanted to implement against the issue. Hence,
each strategy in respect of two hedging strategies or un-hedged position has shown below
tables 1 and 2:
Strategy 2
US$ CAD$ Stock Purchase Price Fluctuations US$ CAD$
1 1 4.5 4.5 654.49 700
1 0.9 1.5 1.35 65.44 70
1 1.1 1.5 1.8 149.59 160
Total 7.5 7.65 869.52 930
Strategy 1
US$ CAD$ Stock Purchase Price Fluctuations US$ CAD$
1 1 4.25 4.25 607.74 650
1 0.9 1.5 1.35 65.44 70
1 1.1 1.25 1.5 93.49 100
Total 7 7.1 766.67 820
HedgeHedging strategies
Hedging strategies Hedge
Table 1: Hedging Strategies in respect to Cain’s Strategy

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Based on the above table 1, it has been identified that strategy two can be considered
to be more reasonable, as it provides more revenue as compared to the strategy 1. At the same
time, a rational hedge value can assist in preventing market risk.
Strategy 2
US$ CAD$ Stock Purchase Price Fluctuations Price
1 1 4.5 0 4.5
1 0.9 1.5 -0.15 1.35
1 1.1 1.5 0.3 1.8
Total 7.5 0.15 7.65
Strategy 1
US$ CAD$ Stock Purchase Price Fluctuations Price
1 1 4.25 0 4.25
1 0.9 1.5 -0.15 1.35
1 1.1 1.25 0.25 1.5
Total 7 0.1 7.1
Un-hedged position
Un-hedged position
Table 2: Un-hedged Strategies In respect to Cain’s Strategy
Based on the above table 2, it can be stated that the price has increased in strategy
two. However, strategy 1 has less benefit, which is US$7.1 million. Hence, strategy 1 will not
able to pay the organizational cost, whereas strategy two can assist in paying the cost with
extra benefit.
Based on the above discussion, strategy 1 with hedging strategies is the best choice, as
it will increase the stock return of the company. Hence, she can hedge her position in US
dollars. This is because, for any reason, if the price of the CAD$ decreases against the US$ in
January, two hedging strategies can be used as an appropriate vehicle, as it can help in
controlling the situation. However, this strategy may not work effectively if the price
decreases to a large extent. On the other hand, the strike price of the call option would be
US$7.5 million. At the same time, Cain also will also be able to receive a hedge value, which
aids her to overcome financial constraints within the market.

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References
Bhuyan, R. & Chaudhury, M. (2005). Trading on the information content of open interest:
Evidence from the US equity options market. Derivative. USA, Trading & Rogulo, 11
(2), 16-36.
Broll, U., Welzel, P. & Wong, K.P. (2008). Export and strategic currency hedging. Retrieved
November 24, 2018, from http://citeseerx.ist.psu.edu/viewdoc/download?
doi=10.1.1.532.6837&rep=rep1&type=pdf
Dejanovski, A. (2014). The role and importance of the options as a unstandardized financial
derivatives. TEM Journal, 3(1), 81-87.
Evans, G.R. (2011). Put and call options. Retrieved November 24, 2018, from
http://pages.hmc.edu/evans/ch7options.pdf