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.