(See the chapter appendix.) Marson, Inc., has some customers in Canada and frequently receives payments denominated in Canadian dollars (C$). The current spot rate for the Canadian dollar is $.75. Two call options on Canadian dollars are available. The first option has an exercise price of $.72 and a premium of $.03. The second option has an exercise price of $.74 and a premium of $.01. Marson, Inc., would like to use a bear spread to hedge a receivable position of C$50,000, which is due in month. Marson is concerned that the Canadian dollar may depreciate to $.73 in 1 month.
a. Describe how Marson, Inc., could use a bear spread to hedge its position.
b. Assume the spot rate of the Canadian dollar in 1 month is $.73. Was the hedge effective?
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