Comparison of techniques for hedging receivables.
a. Assume that Carbondale Ltd expects to receive S$500 000 in one year. The existing spot rate of the Singapore dollar is £0.40. The one-year for- ward rate of the Singapore dollar is £0.41. Car- bondale created a probability distribution for the future spot rate in one year as follows:
|
Future Spot Rate
|
Probability
|
|
£0.41
|
20%
|
|
0.43
|
50
|
|
0.47
|
30
|
Assume that one-year put options on Singapore dollars are available, with an exercise price of £0.40 and a premium of £0.025 per unit. One-year call options on Singapore dollars are available with an exercise price of £0.39 and a premium of £0.02 per unit. Assume the following money market rates:
|
Spot rate of NZ$
|
£0.36
|
|
|
One-year call option
|
Exercise price 5 £0.33; premium 5 £0.046
|
|
One-year put option
|
Exercise price 5 £0.35; premium 5 £0.02
|
|
|
Rate
|
Probability
|
|
Forecasted spot rate of NZ$
|
£0.33
|
20%
|
|
|
0.34
|
50
|
|
|
0.35
|
30
|
| |
UK
|
Singapore
|
|
Deposit rate
|
8%
|
5%
|
|
Borrowing rate
|
9
|
6
|
Given this information, 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 Carbondale should hedge its receivables position.
b. Assume that Black Rod plc 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 Black Rod should hedge its payables position.