# HU Comparison of Techniques f

Comparison of Techniques for Hedging Receivables.

Assume that Carbondale Co. expects to receive S\$500,000 in one year.  The existing spot rate of the Singapore dollar is \$.60.  The one?year forward rate of the Singapore dollar is \$.62.  Carbondale created a probability distribution for the future spot rate in one year as follows:

Future Spot Rate Probability

\$.58                                                         20%

.63                                                         50

.67                                                         30

Assume that one?year put options on Singapore dollars are available, with an exercise price of \$.63 and a premium of \$.04 per unit. One?year call options on Singapore dollars are available with an exercise price of \$.60 and a premium of \$.03 per unit.  Assume the following money market rates:

U.S. Singapore

Deposit rate                         7%                         4%

Borrowing rate                    8                           5

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 unhedged strategy, and decide whether Carbondale should hedge its receivables position.

Forward hedge

Money market hedge

Option hedge

Possible Spot Rate

Exercise

Yes or

No?

Probability

Unhedged Strategy

Possible Spot Rate

Probability

1. Assume that Baton Rouge, Inc. expects to need S\$1 million in one year.  Using any relevant information in part (a) of this question, determine whether a forward hedge, a money market hedge, or a currency options hedge would be most appropriate.  Then, compare the most appropriate hedge to an unhedged strategy, and decide whether Baton Rouge should hedge its payables position.

Forward hedge

Money market hedge

Option hedge

Amount Paid                Total

Option                                                       per Unit                 Amount

Possible       Premium      Exercise           (including                Paid for

Spot Rate per Unit Option? the premium) S\$1,000,000 Probability

Unhedged Strategy

Possible                                                 Total

Spot Rate                                       Amount Paid                   Probability

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