Question

1) An American investor holds a CAD$ Guaranteed Investment Certificate (GIC) which will mature on March 10, 2021 at a value of CAD $205,000. He intends to cash in the GIC at that time because the bill for his house renovation comes due on March 30, 2021. He is afraid that the USD/CAD exchange rate may change unfavourably between now and then and wants to fix the rate at which he can covert the CAD$ GIC proceeds into $US.

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

Jan 15, 2021 .7853 .7864

Feb 15, 2021 .7956 .7968

Mar 15, 2021 .7988 .7999

Apr 15, 2021 .8034 .8040

i. Is he afraid that the US$ will strengthen or weaken against the C$ between now and March 10, 2021?

ii. Should he be buying or selling the C$ micro futures contracts and how many?

iii. For which maturity month?

iv. What will his exchange rate be and what will be the total USD proceeds received upon maturity of the contract(s)?

v. Will he have any unsold CAD left over after doing the above futures contract(s) and if so, what could he do to hedge the forward conversion price into $US ?

(6 marks)

2) A Canadian investor owns 300 shares of Scotiabank (BNS) and wants to protect herself against a large drop in the stock’s price between now and the end of the year.

i. Should she buy BNS stock put options or call options?

ii. To protect herself with a maximum loss of about 10% below the current market price, what strike price should she choose?

iii. What expiry date should she choose?

iv. How many contracts would she need to buy?

v. How much would it cost her to acquire this hedge based on the “ask” price of the options? (ie what would be the total cost of the option contract(s) premium?) Attach a screenshot of the appropriate option’s trading price.

vi. What is the current price of Scotiabank (BNS) shares and what are her 300 shares currently worth? What percentage of that value would she have to spend to hedge with options?

HINTS:

• Go to the Montreal Exchange website (HERE) and find the appropriate Scotiabank option (call or put) with the appropriate strike price and expiry date.

• Each option contract is for 100 shares

• The Bid & Ask prices are PER SHARE not per contract

Answer 1

1)

1. The Investor is afraid that the US$ will Strength against CAD$. This is because he will be exchanging CAD$ for US$ on maturity and strengthening of US$ will give him lesser amount of US$ against the CAD$
   
2. Since the investor will be exchanging CAD$ for US$, he should be selling CAD$ micro future contracts.
   No of Contracts = CAD$ 205,000/CAD$10,000 = 20.5 Contracts or 20 Contracts
   
3. Maturity Month = March 15, 2021
   
4. Exchange rate : 1CAD$ = US$ 0.7988
   Total USD Proceeds upon maturity = 20*CAD$10,000*0.7988 = US$159,760