Novena Limited is a US firm and expects to receive 5$800, 000 in one year. The existing spot rate of the Singapore dollar is US60. 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
The one-year put options on Singapore dollars are available, with an exercise price of US$0.77 and a premium of US60.04 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:
Deposit rate 9% 6%
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.
Calculate the forward contract hedge.
Calculate the money market hedge.
Calculate the option hedge.
Briefly discuss the optimal hedge against the no hedge position of the company.