Comparison of techniques for hedging receivables.

a Assume that Carbondale Ltd expects to receive S$500,000 in one year. The existing spot rate of the Singapore dollar is £0.40. The one-year forward rate of the Singapore dollar is £0.41. Carbondale created a probability distribution for the future spot rate in one year as follows:

Assume that one-year put options on Singapore dollars are available, with an exercise price of £0.40 and a premium of £0.025 per unit. One-year call options on Singapore dollars are available with an exercise price of £0.39 and a premium of £0.02 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 the most appropriate. Then compare the most appropriate hedge to an unhedged strategy, and decide whether Carbondale should hedge its receivables position.
b Assume that Black Rod plc expects to need S$1 million in one year. Using any relevant information in part (a)
of this question, 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 Black Rod should hedge its payables position.

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Future spot rate Probability 0.41 20% 0.43 0.47 50 30