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Probability distribution for the future spot rate

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Assume that Catholics United expects to disburse S$500,000 in one year. The existing spot rate of the Singapore dollar is US$0.70. The one-year forward rate of the Singapore dollar is US$0.72. Catholics United created a probability distribution for the future spot rate in one year as follows:

Future Spot Rate Probability
US$0.68 20%
0.73 50
0.77 30

Assume that i) one-year put options on Singapore dollars are available, with an exercise price of US$0.73 and a premium of US$0.04 per unit and ii) one-year call options on Singapore dollars are available, with an exercise price of US$0.70 and a premium of US$0.03 per unit. Assume the following money market rates:

U.S. Singapore
Deposit rate 2% 8%
Borrowing rate 3 9

Given this information, evaluate the use of i) forward hedge ii) money market hedge , and iii) a currency options hedge. Which hedge is most appropriate and why

Reference no: EM132999791

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