Probability distribution for the future spot rate

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Reference no: EM13934881

LOU Limited is a US firm and expects to receive Singapore $800, 000 in one year. The existing spot rate of the Singapore dollar is US$0. 74. The one-year forward rate of the Singapore dollar is US$0.76. Novena Limited created a probability distribution for the future spot rate in one year as follows:

Future Spot Rate Probability

USD0.75 20%

USD0.77 50%

USD0.81 30%

The one-year put options on Singapore dollars are available, with an exercise price of US$0.77 and a premium of US$0.04 per unit. One-year call options on Singapore dollars are available with an exercise price of US$0.74 and a premium of U$0.03 per unit. Assume the following money market rates:

U.S. Singapore

Deposit rate 9% 6%

Borrowing rate 10% 7%

Given this 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 unheeded strategy, and decide whether Novena Limited should hedge its receivables position.

Required:

Calculate the forward contract hedge.

Calculate the money market hedge.

Calculate the option hedge.

Briefly discuss the optimal hedge against the no hedge position of the company.

Reference no: EM13934881

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