Lorre Company Needs 200,000 Canadian Dollars (C$) in 90 Days

Lorre Company needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar:
$\begin{array}{cc}{\text { Possible Value of }} \\\text { Canadian Dollar in 90 Days } & \text { Probability } \\\hline \$ 0.54 & 15 \% \\0.57 & 25 \% \\0.58 & 35 \% \\0.59 & 25 \%\end{array}$
The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of the Canadian dollar in 90 days is $.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging?

A) 40%.
B) 60%.
C) 15%.
D) 85%.

Correct Answer:

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