Business

FinanceInternational Financial ManagementComparison of Techniques for Hedging Receivables Assume that Carbondale Co. expects to receive $500,000 in one year. The existing spot rate of the singapore dollar is $0.60. The one-year for ward rate of the singapore dollar is $0.62. Carbondale created the following probability distribution for the future spot rate in one year: Assume that one-year put options on singapore dollars are available, with an exercise price of $0.63 and a premium of $0.04 per unit. One-year call options on singapore dollars are available with an exercise price of $0.60 and a premium of $0.03 per unit. Assume the following money market rates: 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. Assume that Baton Rouge, Inc., expects to need $1 million in one year. Using any relevant information in part (a) of this question, determine whether a for ward 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 Baton Rouge should hedge its payables position.FindFind*launch*

14th Edition

Madura

Publisher: Cengage

ISBN: 9780357130698

Chapter 11, Problem 32QA

Textbook Problem

Comparison of Techniques for Hedging Receivables

- Assume that Carbondale Co. expects to receive $500,000 in one year. The existing spot rate of the singapore dollar is $0.60. The one-year for ward rate of the singapore dollar is $0.62. Carbondale created the following probability distribution for the future spot rate in one year:

Assume that one-year put options on singapore dollars are available, with an exercise price of $0.63 and a premium of $0.04 per unit. One-year call options on singapore dollars are available with an exercise price of $0.60 and a premium of $0.03 per unit. Assume the following money market rates:

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.

This textbook solution is under construction.