Overhedging
Response to the following problem:
Denver Co. is about to order supplies from Canada that are denominated in Canadian dollars (C$). It has no other transactions in Canada and will not have any other transactions in the future. The supplies will arrive in 1 year and payment is due at that time. There is only one supplier in Canada. Denver submits an order for three loads of supplies, which will be priced at C$3 million. Denver Co. purchases C$3 million 1 year forward, since it anticipates that the Canadian dollar will appreciate substantially over the year. The existing spot rate is $.62, while the 1-year forward rate is $.64. The supplier is not sure if it will be able to provide the full order, so it only guarantees Denver Co. that it will ship one load of supplies. In this case, the supplies will be priced at C$1 million. Denver Co. will not know whether it will receive one load or three loads until the end of the year.
Determine Denver's total cash outflows in U.S. dollars under the scenario that the Canadian supplier only provides one load of supplies and that the spot rate of the Canadian dollar at the end of 1 year is $.59.
Show your work.