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4 (30%) Assume that Carbondale Co. expects to receive S$1 million 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 $.61 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 8% 5% Borrowing rate 9% 6% a. Given this information, determine whether a forward hedge, money market hedge (two methods, i.e., three- step method and IRP method), or a currency options hedge would be most appropriate. Then compare the most

4 (30%) Assume that Carbondale Co. expects to receive S$1 million 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 $.61 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 8% 5% Borrowing rate 9% 6% a. Given this information, determine whether a forward hedge, money market hedge (two methods, i.e., three- step method and IRP method), or a currency options hedge would be most appropriate. Then compare the most

A First Course in Probability (10th Edition)
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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4 (30%) Assume that Carbondale Co. expects to receive S$1 million 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 $.61 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 8% 5% Borrowing rate 9% 6% a. Given this information, determine whether a forward hedge, money market hedge (two methods, i.e., three- step method and IRP method), 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. (15%) b. Assume that Baton Rouge, Inc. expects to need S$2 million in one year. Using any relevant information in part (a) of this question, determine whether a forward hedge, a money market hedge (two methods, i.e., three- step method and IRP method), 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. (15%) (20.0%)
Transcribed Image Text:4 (30%) Assume that Carbondale Co. expects to receive S$1 million 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 $.61 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 8% 5% Borrowing rate 9% 6% a. Given this information, determine whether a forward hedge, money market hedge (two methods, i.e., three- step method and IRP method), 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. (15%) b. Assume that Baton Rouge, Inc. expects to need S$2 million in one year. Using any relevant information in part (a) of this question, determine whether a forward hedge, a money market hedge (two methods, i.e., three- step method and IRP method), 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. (15%) (20.0%)
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