6. Your firm, ABC Berhad, has a payable account amount of SGD1,000,000 in 3 months. Your company is considering hedging the cash flows. Your firm analysts prepare the following information. Spot rate 90-day forward rate 90-day interest rate in Malaysia: 8%; 9% per annum 90-day interest rate in Singapore : 3%; 4% per annum 90-day options : MYR3.0950/SGD; MYR3.0960/SGD : 100;200 Scenario First Second Third : Exercise price: MYR3.0952 (Call premium: MYRO.0350/SGD; Put premium: MYR0.0450/SGD) Table 1: Forecasted future spot exchange rate in 90 days Forecasted future spot exchange MYR3.0950/SGD MYR3.0952/SGD MYR3.1000/SGD a. If your firm decides to hedge the foreign exchange risk exposure, state the strategy you will use for the following alternative strategies: i. a forward hedge il. an option hedge b. Calculate the expected net value in Malaysian Ringgit (MYR) of your firm cash flow in months for each of the possible future spot rates as in Table 1 for each alternative strategy in (a). c. Based on your answer in (b), state the hedging strategy your company will choose for each of the possible spot exchange rate scenarios as in Table 1.

6. Your firm, ABC Berhad, has a payable account amount of SGD1,000,000 in 3 months. Your company is considering hedging the cash flows. Your firm analysts prepare the following information. Spot rate 90-day forward rate 90-day interest rate in Malaysia: 8%; 9% per annum 90-day interest rate in Singapore : 3%; 4% per annum 90-day options : MYR3.0950/SGD; MYR3.0960/SGD : 100;200 Scenario First Second Third : Exercise price: MYR3.0952 (Call premium: MYRO.0350/SGD; Put premium: MYR0.0450/SGD) Table 1: Forecasted future spot exchange rate in 90 days Forecasted future spot exchange MYR3.0950/SGD MYR3.0952/SGD MYR3.1000/SGD a. If your firm decides to hedge the foreign exchange risk exposure, state the strategy you will use for the following alternative strategies: i. a forward hedge il. an option hedge b. Calculate the expected net value in Malaysian Ringgit (MYR) of your firm cash flow in months for each of the possible future spot rates as in Table 1 for each alternative strategy in (a). c. Based on your answer in (b), state the hedging strategy your company will choose for each of the possible spot exchange rate scenarios as in Table 1.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter3: International Financial Markets

Section: Chapter Questions

Problem 3BIC

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