Medex, a Florida corporation, has an account receivable (A/R) from a Canadian customer for C$ 5 million due in 6 months. Given the following information:
Spot rate: C$ 1.000 / US$
6 month Forward rate: C$ 1.080 / US$
6 months Canadian interest rate: 3.70 %
6 months U.S. interest rate: 1.50 %
Six month C$ call at strike price of C$1.00 / US$ is $0.040 per C$.
Six month C$ put at strike price of C$1.00 / US$ is $0.030 per C$.
Amount of account receivable: C$ 5,000,000
How would you hedge the account receivable (A/R) using the Forward Market, Money Market and the Options market? Calculate the U.S. dollar equivalent of the hedged amount of the account receivable, for each method write out the steps and amounts involved so yo can receive full credit. If Medex hedges the FX risk, what other risk does it still face with respect to the A/R?