Novena Limited is a US firm and expects to receive S$800, 000 in one year. The e
ID: 2719288 • Letter: N
Question
Novena Limited is a US firm and 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. Novena Limited created a probability distribution for the future spot rate in one year as follows:
Future Spot Rate Probability
USD0.75 20%
USD0.77 50%
USD0.81 30%
The 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% 8%
Borrowing rate 10% 7%
Given this information, determine whether a forward hedge, 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 Novena Limited should hedge its receivables position
. Required:
Calculate the forward contract hedge.
Calculate the money market hedge.
Calculate the option hedge.
(15 marks)
Briefly discuss the optimal hedge against the no hedge position of the company
. (5 marks)
PLZ ANSWER IT IN MS-WORD FORMAT. I POSTED THIS 1 HOUR AGO N GOT ANSWER IN MS-EXCEL AND I CANT UNDERSTAND IT.
Explanation / Answer
Money Market Forward =(1+10%)/(1+6%)*.74=.77 Amount to Receive in $ Future Spot Rate (S) Probability Forward Price(F) MM(F) Option profitper S$ Amuont to Receive Unhedged Forward Option(put) MM Forward (USD/Singapore dollar (-0.04+MAX(0.77-S,0) Singapore dollar(A) $(S*A) (F*A) (profit+S)*A (MM(F)*A) 0.75 20% 0.76 0.77 -0.02 8,00,000 600000 608000 584000 614340 0.77 50% 0.76 0.77 -0.04 8,00,000 616000 608000 584000 614340 0.81 30% 0.76 0.77 -0.04 8,00,000 648000 608000 616000 614340 Net Amount Recceived 622400 608000 593600 614340 Net Amount Recceived in unhedged position=20%*600000+50%*616000+20%*648000=622400 money market hedge with the highest possible Net Amount Recceived of 614340 is the best hedge possible. The most appropriate hedge has a less expected payoff of 614340 than unhedged position with payoff of 622400. Thus it would be appropirate for Novena Limited to not to hedge its receivables position.