Pls do not handwrite the answer, this is for easy reading Question:- OK-Lah Pte
ID: 2621337 • Letter: P
Question
Pls do not handwrite the answer, this is for easy reading
Question:-
OK-Lah Pte Ltd, a Singapore based company, needs to import goods from the US for a total of 5 million USD, to be paid in 3-month' time. The current exchange rate USD/SGD is 1.32, but Mrs. Tan, OK-lah's treasurer, is well aware that this rate may change in 3 months' time, and is envisaging to hedge herself with an option. She has thus obtained the following prices, which show the bid and ask prices for each option.
A) what is the risk incurred by OK-Lah?
B) Which option is she going to engage in? Describe how she should do it (buy or sell).
C) if, 3 months later, the USD?SGD rate has moved to 1.28 or 1.30, or 1.32 or 1.35 or 1.38 or 1.50, simulate how much OK-lah will have to pay if Mrs. Tan did not hedge her exposure. Calculate also how much she will have to pay if she put in place the option hedge defined above(present the results in the table her below).
Expiry in 3 months (American options) Premium in SGD per USD
CALLS(USD Call/SGD Put Strike Price PUTS(USD Put/SGD Call) 0.052-0.055 1.3 0.014-0.017 0.036-0.38 1.31 0.017-0.019 0.024-0.025 1.32 0.021-0.022 0.017-0.019 1.33 0.04-0.042 0.008-0.011 1.34 0.058-0.061
Explanation / Answer
A) Ok-Lah needs to pay 5 Million USD for the imported goods in 3 months time. The risk is that the USD may appreciate relative to SGD (equivalent to SGD depreciates). If USD appreciates, Ok-Lah will need to pay more in terms of SGD for the goods imported.
B) Since the risk is that USD would appreciate (SGD depreciate), best option is to buy a call on USD (equivalent to buying put on SGD) with 3 months expiry. In order to lock-in today's rate of USD/SGD of $1.32, strike price of $ 1.32 should be selected. In order to hedge the risk of 5 Million USD, she would need to buy total of 5 Million options. As from table we see, she will be able to buy at the ask price of '0.025 SGD per USD'.
C)
SGD Cost if no hedge = Amount * SUSD/SGD = 5 Million * SUSD/SGD?
(where SUSD/SGD? is the spot rate 3 months from now)
SGD Cost if hedge = [SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million - Per Option Premium * 5 Million
=[SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million + 0.025 * 5 Million
=[SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million + 0.125 Million
(where SUSD/SGD? is the spot rate 3 months from now)
=Amount * SUSD/SGD
=5 Million * 1.28
= 6.4 Million
= (1.28-0) * 5 M + 0.125 M
= 6.525 M
=5 Million * 1.3
= 6.5 Million
= (1.3-0) * 5 M + 0.125 M
= 6.625 M
=5 Million * 1.32
= 6.6 Million
[SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million + 0.125 Million
= (1.32-0) * 5 M + 0.125 M
= 6.725 M
=5 Million * 1.35
= 6.75 Million
= 1.32 * 5 M + 0.125 M
= 6.725 M
=5 Million * 1.38
= 6.9 Million
= 1.32 * 5 M + 0.125 M
= 6.725 M
=5 Million * 1.5
= 7.5 Million
= 1.32 * 5 M + 0.125 M
= 6.725 M
Spot USD/SGD Formula (no hedge) SGD Cost (no hedge) Formula (hedge) SGD Cost (hedge) 1.28=Amount * SUSD/SGD
=5 Million * 1.28
= 6.4 Million
[SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million + 0.125 Million= (1.28-0) * 5 M + 0.125 M
= 6.525 M
1.30 =Amount * SUSD/SGD=5 Million * 1.3
= 6.5 Million
[SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million + 0.125 Million= (1.3-0) * 5 M + 0.125 M
= 6.625 M
1.32 =Amount * SUSD/SGD=5 Million * 1.32
= 6.6 Million
[SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million + 0.125 Million
= (1.32-0) * 5 M + 0.125 M
= 6.725 M
1.35 =Amount * SUSD/SGD=5 Million * 1.35
= 6.75 Million
[SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million + 0.125 Million= 1.32 * 5 M + 0.125 M
= 6.725 M
1.38 =Amount * SUSD/SGD=5 Million * 1.38
= 6.9 Million
[SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million + 0.125 Million= 1.32 * 5 M + 0.125 M
= 6.725 M
1.50 =Amount * SUSD/SGD=5 Million * 1.5
= 7.5 Million
[SUSD/SGD - MAX(SUSD/SGD - 1.32)] * 5 Million + 0.125 Million= 1.32 * 5 M + 0.125 M
= 6.725 M