Juan Garcia, a newly minted MBA of a prestigious East Coast U.S. university, has been assigned to the treasury department at Cemex as part of his management training program's rotation. He has now been given the task of recommending a hedging strategy to protect a 10 million Singapore dollar (S\$) account receivable due in three months. The recipient is Cementos de Mexico (Cemex), a large Mexican MNE that exports cement to worldwide markets. Because of the nature of its business, Cemex considers the U.S. dollar to be its functional currency rather than the Mexican new peso.

Juan Garcia has been specifically assigned as staff assistant to José Rios, Treasurer of Cemex. Mr. Garcia's first step was to collect currency and interest rate quotes from the World Wide Web to compare alternative hedging strategies. He collected the following quotes which he in turn reported to José Rios. The older and more experienced Treasurer smiled, patted Juan Garcia on the back, and said: "Do another search and talk to our bankers. These quotes are too good to be true. There is no free lunch in finance."

The original quotes collected by Juan Garcia were as follows:

a. Why is José Rios suspicious of these quotes?

b. If the quotes are correct, how could Cemex benefit?

c. Which, if any, quotes seem to be reasonable?

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Spot rate (U.S. cents/S$): Three-month forward rate (U.S. cents/SS): Three-month Singapore dollar interest rate: Three-month U.S. dollar interest rate: Three-month call option on Singapore dollars at strike price 65.000: Three-month put option on Singapore dollars at strike price 65.000: 60.0000/S$ 60.4658/S$ 2.5000% p.a. 5.6250% p.a. 0.0449 or 7.48% 0.0002 or 0.03%