Ashton plc, a UK-based firm, imports computer components from the Far East. The trading currency is Singapore dollars and the value of the deal is 28m Singapore dollars (S$). Three months’ credit is given. The current spot exchange rate is S$2.80 vs. £1. Because of recent volatility in the foreign exchange markets, Ashton’s directors are worried that a rise in the S$ could wipe out the profits on the deal. Three alternative hedging methods have been suggested:

a forward market hedge;

a money market hedge;

an option hedge.

Ashton’s treasurer discovers the following information:

The three-month forward rate is S$2.79 vs. £1 Ashton can borrow in S$ at 2% interest (annual rate), and in London at 5 per cent p.a.

Deposit rates are 1 per cent p.a. in Singapore and 3 per cent p.a. in London A three-month American call option to buy S$28m at an exercise rate of S$2.785 vs. £1 could be purchased at a premium of £200,000 on the London OTC option market Required Show how each hedge would operate for each of the following spot rates in three months’ time:

(a) S$2.78 vs. £1

(b) S$2.82 vs. £1