A Canadian corporate treasurer expects to receive USD $10,000,000 in three months from an export sale. The current CAD/USD spot rate is 1.2800, but the treasurer is concerned about potential appreciation of the Canadian dollar, which would reduce the CAD value of the USD receipts. To lock in an exchange rate for this future transaction, the treasurer is considering entering into a derivative contract. Which derivative is most appropriate for this purpose?

Question: A Canadian corporate treasurer expects to receive USD $10,000,000 in three months from an export sale. The current CAD/USD spot rate is 1.2800, but the treasurer is concerned about potential appreciation of the Canadian dollar, which would reduce the CAD value of the USD receipts. To lock in an exchange rate for this future transaction, the treasurer is considering entering into a derivative contract. Which derivative is most appropriate for this purpose?

Answer options:

• Buying a CAD/USD call option.
• Selling a CAD/USD put option. ✅ Entering into a forward contract to sell USD and buy CAD in three months.
• Entering into a future contract to buy USD and sell CAD in three months.

Correct answer: Entering into a forward contract to sell USD and buy CAD in three months.

Explanation: To hedge the risk of a stronger CAD (meaning USD receives less CAD), the treasurer needs to lock in a future exchange rate to sell USD and buy CAD. A forward contract is ideal for this over-the-counter, customized transaction. Futures contracts are standardized and exchange-traded, while options provide flexibility but require premium payment, and the treasurer wants to lock a rate.