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What is the expected gain or loss from the forward hedging

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Reference no: EM132552084

Apple, an American company, sold a mobile phone chip from a Singaporean company, for which Apple billed S$ 220 million. The invoice is payable in 6 months. The current information is available in the foreign exchange market:

$/S$

Spot 0.8645

6-month forward 0.8656

6-month call option strike price 0.8662

6-month call option premium ($ per S$) 0.01

6-month put option strike price 0.866

6-month put option premium ($ per S$) 0.015

Question (a) If the expected spot exchange rate in 6 months is 0.8731 $/S$. What is the expected gain/loss from the forward hedging? If you were the financial manager of Apple, would you recommend hedging this foreign exchange exposure? Why or why not?

Question (b) Suppose the foreign exchange advisor predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? Why or why not?

Question (c) Suppose you would like to hedge using options. Explain which option position you would enter.

Question (d) The current interest rate in the US is 5% p.a. What is the $ proceeds of this option hedge if the future spot rate is $0.8700/S$?

Reference no: EM132552084

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