Question

1) A Canadian investor holds a US$ Guaranteed Investment Certificate (GIC) which will mature on March 10, 2021 at a value of US $75,000. He intends to cash in the GIC at that time because the bill for his house renovation comes due on March 30, 2021. He is afraid that the USD/CAD exchange rate might move unfavourably between now and then so he wants to fix the rate at which he can covert the US$ GIC proceeds into CS. He has come to you for assistance so you went to the Chicago Mercantile Exchange (CME) website and found the following: Canadian Dollar Micro Futures Quotes Each of the following futures contracts is to buy C$ 10,000 and is quoted as US$ per Canadian Dollar. Settlement Date__ Bid Ask .7853 .7864 Jan 15, 2021 Feb 15, 2021 .7956 7968 .7988 7999 Mar 15, 2021 Apr 15, 2021 .8034 .8040 i. iii. Is he afraid that the C$ will strengthen or weaken against the US$ between now and March 2021? Should he be buying or selling the C$ micro futures contracts and how many? For which maturity month? What will his exchange rate be and what will be the total USD price he will pay upon maturity of the contract(s)? Will he have any unsold USD left over after the above futures transaction and if so, what could he do to hedge the C$ conversion price of any left over US$? v.

Answer 1

i) The Investor is in Canada, so he is afraid that the Canadian dollar will strengthen against the US dollar between now and March 2021.

ii) Since the micro futures contract is to buy Canadian dollars and in March 2021 he shall be required to sell his USD and buy the Canadian dollars , he should buy the contracts today. As one Contract is for C$10000 which shall be equal to apx US$ 10000* 0.8 (approximate rate of US$ per C$ in March 2021 ) = US$ 8000, he can buy 75000/8000 = 9 contracts

iii) The GIC will mature on March 10 , 2021 hence it is advisable to buy March 15, 2021 contracts as it is closest and the basis risk shall be the lowest.

iv) The Investor shall buy the March 2021 contracts at US$ 0.7999 (ask price) , so his realised exchange rate shall be US$0.7999 per C$. Total USD price paid at maturity will be

9 contracts * C$ 10000 /contract * US$ 0.7999/C$

= US$ 71,991