ADMS 4540 Lecture Notes - Lecture 1: Call Option, Spot Contract
Document Summary
A canadian company will pay u. s. million for imports from u. s. in 3 months decides to hedge using a long position in a forward contract at an exchange rate of can. 20/u. s. . An investor owns 1,000 microsoft shares currently worth per share. A two-month put with a strike price of costs . The investor decides to hedge by buying 10 put contracts (each contract for 100 shares costing ). The 1st example: note that the company might do better if it chooses not to hedge than if it chooses to hedge. in 3 months, the hedge is not good. On the other hand, if the exchange rate is can. 30/u. s in 3 months, the hedge is good. There is no guarantee that the outcome with hedging will be better than the outcome without hedging. The 2nd example: the investor is concerned about a possible share price in the next 2 months.