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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.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92758651

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