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Determine a forward hedge would be

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The existing spot rate of the Singapore dollar is SGD/USD = 0.752. The 3-month forward rate of the Singapore dollar is SGD/USD = 0.754. The probability distribution of the future spot rate in 3 months is forecasted as follows:

Future Spot Rate SGD/USD        Probability
0.736                                             20%
0.751                                                50
0.768                                                   30

The money market interest rates are quoted in Annual Percentage Rate as below:

                                     U.S.                   Singapore
Deposit rate:             0.82%                1.30%
Borrowing rate:          3.25                  5.25

  • A 3-month put option on Singapore dollars is available, with an exercise price of SGD/USD = 0.752 and a premium of $.03 per unit. A 3-month call option on Singapore dollars is available with an exercise price of SGD/USD = 0.762 and a premium of $.01 per unit.

Problem 1: Assume that ABC Co. will need to pay 2 million Singapore dollars in 3 months. Given the above relevant information, determine whether a forward hedge, money market hedge or a currency options hedge would be most appropriate. Then compare the most appropriate hedge to an unhedged strategy and decide whether ABC Co. should hedge its receivables position.

Reference no: EM132775075

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