11. STF Bhd. (STF), a Malaysian company listed on Bursa Malaysia, is currently producing computer chips for domestic consumption. Due to intense competition in the Malaysian market, the company has came out with two strategies, namely international expansion strategy and money market investment strategy, to sustain and to maximise its shareholders wealth.

In line with its international expansion strategy, STF Bhd. signed a contract to export computer chips to ICMM, a U.S. electronics company and will receive USD1,500,000 in six months. The company is concerned about the fluctuations in the U.S. dollar due to the recent trade war between the U.S. and China. Therefore, STF Bhd. has decided to hedge the U.S dollar receivable to manage its exchange exposure.

In addition, the company has allocated MYR2,000,000 to invest in the U.S. money market for one year.

Here are some information in the international market:

Current spot exchange rate: MYR4.1420/USD

Six- month forward rate: MYR4.1104/USD

One-year forward rate:MYR4.2240/USD

Interest rate in the U.S.: 4.0% per annum

Inflation rate in the U.S. : 1.5% per annum

Interest rate in Malaysia : 5.0% per annum

Inflation rate in Malaysia : 2.5% per annum

1. Compute the guaranteed ringgit (MYR) proceeds from the sales if STF Bhd. were to hedge the USD1,500,000 account receivable with a forward contract.

2. If STF Bhd. wishes to hedge the USD1,500,000 account receivable using money market instruments, what action does STF Bhd. need to take? What would be the guaranteed ringgit proceeds from the U.S. dollar sales with a money market hedge?

3. Based on the answers above, determine the hedging alternative that you would recommend to the company. Explain with an appropriate reason.

4. For the money market investment strategy, compute the arbitrage profit/loss in ringgit if STF Bhd. were to invest MYR2,000,000 in the U.S. money market (assuming no transaction costs and taxes exist).