1.Assume that Carbon Co. expects to receive 128 million South African Rand (ZAR) in three months. The spot rate for SGD is $0.068. The three month forward rate for ZAR is $0.063. Carbondale thinks the spot rate in three months could be $0.057 (with 7.5% probability), $0.059 (with 12.5% probability), $0.061 (with 35% probability), $0.064 (with a 40% probability) or $0.67 (with a 10% probability). One year call options on ZAR have a strike price of $0.060 with a premium of $0.006 One year put options on ZAR have a strike price of $0.066 with a $0.004 premium. Interest rates (all annualized rates) in the US are 3% on deposits and 4% on borrowing, while in South Africa rates are 10% on deposits and 12% on borrowing.

Given this information, which approach would you recommend as most appropriate for Carbon (unhedged v. forward hedge v. money market hedge v. call hedge v. put hedge)? To answer this, you have to do the relevant calculations for each approach and compare. Which alternatives can you eliminate completely? What factors about Carbon and Carbon's management would you need to know (if any) to choose the one optimum approach?

2.(30 Points) Sodium, Inc. buys supplies from South Africa. It has a contract to buy 45 million ZAR worth of supplies in three months. Using the forex info from the prior problem about Carbon Co, which approach would you recommend as most appropriate for Sodium (unhedged v. forward hedge v. money market hedge v. call hedge v. put hedge)? To answer this, you have to do the relevant calculations for each approach and compare. Which alternatives can you eliminate completely? What factors about Sodium and Sodium's management would you need to know (if any) to choose the one optimum approach?