A Canadian exporter anticipates receiving USD 1,000,000 in three months. The current spot exchange rate is C$1.35/US$. To hedge against an unfavourable movement in the exchange rate (i.e., a depreciation of the USD relative to the CAD), which derivative strategy would be most appropriate?

Question: A Canadian exporter anticipates receiving USD 1,000,000 in three months. The current spot exchange rate is C$1.35/US$. To hedge against an unfavourable movement in the exchange rate (i.e., a depreciation of the USD relative to the CAD), which derivative strategy would be most appropriate?

Answer options:

• Buying CAD call options.
• Selling CAD put options.
• Entering a forward contract to sell USD for CAD. ✅ Buying USD put options.

Correct answer: Buying USD put options.

Explanation: The exporter is long USD and wants to protect against a decrease in their value. Buying USD put options would allow them to sell USD at a predetermined strike price if the CAD strengthens (USD depreciates), thus hedging the downside risk.