Impact of Information on Currency Futures and Options Prices
Solve the following problem:
Myrtle Beach Co. purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It can purchase a 90-day forward contract on Singapore dollars at $.50 or purchase a call option contract on Singapore dollars with an exercise price of $.50. This morning, the spot rate of the Singapore dollar was $.50. At noon, the central bank of Singapore raised interest rates, while there was no change in interest rates in the United States. These actions immediately increased the degree of uncertainty surrounding the future value of the Singapore dollar over the next 3 months. The Singapore dollar's spot rate remained at $.50 throughout the day
a. Myrtle Beach Co. is convinced that the Singapore dollar will definitely appreciate substantially over
b. Assume that Myrtle Beach Co. uses a currency options contract to hedge rather than a forward contract. If Myrtle Beach Co. purchased a currency call option contract at the money on Singapore dollars this ternoon, would its total U.S. dollar cash outflows be more than, less than, or the same as the total U.S. dollar cash outflows if it had purchased a currency call option contract at the money this morning? Explain.