existing...
Assume that Pomo Limited, a US based firm, expects to receive S$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. Pomo created a probability distribution for the future spot rate in one year as follows:
Future Spot | Rate Probability
US$0.75 | 20%
US$0.77 | 50%
US$0.81 | 30%
Assume that 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%
Briefly discuss the optimal hedge against the no hedge position of the company.