Cash flows as those from the rule in the contract

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Reference no: EM13952319

1. Your US-based firm is about to sign a contract to buy a machine from a manufacturer based in Singapore. The price of the machine is S$ 3,000,000 and the payment is to be made in US$ after one year (at t = 1) according to the following rule. If the spot rate at t = 1 (e1) is between $0.68/S$ and $0.72/S$, the payment in US$ is to be computed using e1. If e1 is less than $0.68/S$, the payment in US$ is to be computed using $0.68/S$. If e1 is greater than $0.72/S$, the payment in US$ is to be computed using $0.72/S$.

(i) Show in a table form the end of period cash flows (in US$) for e1 ranging from $0.66/S$ to $0.74/S$.

(please explain US cash flows I already know what they are)

(ii) Alternatively, suppose that your firm makes the payment in S$ by buying S$ in the spot market at t = 1, that is, must pay S$ 3,000,000 to the Singapore firm. Show the option portfolio that you could hold to ensure that you have the same end-of-period US$ cash flows as those from the rule in the contract.

Reference no: EM13952319

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